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Costing Methods In Inventory Control

Problem Details:

What is the difference between the costing methods available?

 

Solution:

Different costing methods can be used to value inventory and determine cost of goods sold.  The costing method is assigned to Account Sets (IC Options / Account Sets), and account sets are assigned to items.  Therefore, it is possible to have different items being costed in different ways.  There are between 6 - 8 costing methods available to be used, depending on whether or not the user has a license to use Serial or Lot Numbers.  Following is a brief overview of each costing method:

  1. Moving Average:  Inventory Control pools the costs of all acquired units at a location, so that the costs of one unit cannot be distinguished from the costs of another. This unit cost is an average of all units in the location’s pool at that time.
  2. FIFO (First In First Out):   Inventory Control assumes that the first units to arrive at a location are the first units shipped. Consequently, the units on hand in the closing inventory are assumed to be from the most recent purchases, and current revenues are matched to oldest costs
  3. LIFO (Last In First Out):  the program assumes that the last units to arrive at a location are the first ones shipped. Consequently, the units on hand in the closing inventory are assumed to be from the oldest purchases, and current revenues are match to most recent costs. 
  4. Standard: Standard costs are predetermined targets or attainable costs that are useful in building budgets and gauging performance. This method might be used if the item costs do not vary much, or if stock turnover is rapid.  Inventory Control records the difference between the moving average cost and the standard cost in the cost variance general ledger account, and uses weighted moving average to value the inventory.  Standard costs are manually entered through the Location Details screen.
  5. Most Recent:  Inventory Control assigns the cost of the most recently acquired unit at the location to all units shipped. Consequently, the units on hand in the closing inventory are assumed to be from the oldest acquisitions. The program uses the moving average to value inventory when the costing method is most recent cost.
  6. User-Specified: User-specified costing allows the user to enter costs for items as they are shipped. It is mandatory to use this costing method for all non-stock items. It can also be used for stock items.  Under this costing method, stock items are received and inventory valued at moving average cost. When an item is shipped, the user enters the unit cost or extended cost.
  7. Serial: The cost per serial number = Total cost for a detail line / Quantity of serial numbers generated for the detail, including any Additional Costs.  When shipping serialized items, the cost associated with each serial number is the cost of the shipped item 
  8. Lot: The cost per lot = Total cost for a detail line / Number of lots generated for the detail, including any Additional Costs.  When shipping lotted items:
    • If the entire lot is shpped, the cost of the shipment is the total cost of the lot.
    • If less than the total lot quantity is shipped, the cost of the shipment is the average unit cost for the lot, multiplied by the number of units shipped.

 

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