The cost of a product can be calculated at any time, as needed according to the accounting policies of the company.
It is recommended that actual cost is calculated at the end of the period in which all operations have been completed, meaning all incoming and outgoing invoices have already been posted for this period. For example, the calculation date can be the last day of the previous month.
If cost is calculated on the current date or a date close to the current one, the chances are high that new operations will impact the accuracy of the calculation. Therefore, posting of such operations will get the given calculation deleted.
The costing method can be set up in the menu My Company -> Settings -> Company profile -> General Info. The two most common methods used for inventory valuation are AVG (Weighted Average Cost method) and FIFO. More information about costing methods can be found here.
To start the product cost calculation go to Warehouse -> Product Cost, enter the date and click on the "Calculate Now" button.
Before calculating a product cost, make sure that all shipments prior to the calculation date are closed. Any pending shipments can be found at Warehouse -> Documents -> Waiting for Approval
If any of the documents related to the movement of goods is issued, revised or deleted prior to the date of product cost calculation, such product cost calculation will be deleted along with all its journal entries, and the product cost will need to be calculated again.
When a new product cost is calculated, the previous calculation is saved in the product cost calculation history and is assigned a status of “Voided” in the list of product cost calculations. If approved, the journal entry for the previously calculated product cost will be saved. Otherwise, it will be deleted when the product cost is calculated again.
In case a perpetual inventory method is used, the undefined standard cost of a product will be changed for its calculated cost. More information about perpetual and periodic inventory can be found here.
Product cost calculation runs in the background, meaning the user can start one, switch to some other activity, and then go back and see the results. Upon the completion of product cost calculation, a journal entry is generated with a status of “Waiting for approval”.
The completed product cost calculation contains the following tabs:
- Standard Cost Valuation (for perpetual inventory only)
- Price List Markup
- Journal Entries
The Products tab contains a list of products, closing quantity as of the date of their cost calculation, the cost of each product, and the stock cost as of the date of its cost calculation.
The Standard Cost Valuation tab is available for companies using the perpetual inventory method. It has filters for evaluating a cost variance between the standard cost of a product and its actual cost. By clicking on the Update standard cost button you can update the standard cost for the filtered products to the actual calculated cost.
The Price List Markup tab contains filters for markup analysis (the difference between the cost of a product and its selling price) enabling the user to see if the selling price of a product needs to be changed when its cost changes. By entering a new markup and clicking on the Update button you can update the selling prices for the filtered products.
The Journal Entries tab contains a journal entry for the current cost calculation. The entry is created with a status of Waiting for approval. To review the entry for accuracy, click on its number. A window will open giving you a general view of the entry. By clicking on the magnifying glass icon, you will get a detailed view of the entry in the context of products. Having made sure the entry is correct, click Approve.