Inventory valuation methods are used to calculate the cost of goods sold and cost of ending inventory.
Following inventory valuation methods are supported by RepairDesk.
Weighted Average Method First-In, First-Out Method Last-In, First-Out Method
Weighted Average Method (W.A)
Under average cost method, weighted average cost per unit is calculated for the entire inventory on hand which is used to record cost of goods sold. Weighted average cost per unit is calculated as follows:
Weighted Average Cost per Unit= Total cost of goods sold / Total unit in inventory
First-In, First-Out Method (FIFO)
According to FIFO, it is assumed that items from the inventory are sold in the order in which they are purchased or produced. This means that cost of older inventory is charged to cost of goods sold first and the ending inventory consists of those goods which are purchased or produced later. This is the most widely used method for inventory valuation. FIFO method is closer to actual physical flow of goods because companies normally sell goods in order in which they are purchased or produced
Last-In, First-Out Method (LIFO)
This method of inventory valuation is exactly opposite to first-in-first-out method. Here it is assumed that newer inventory is sold first and older remains in inventory. When prices of goods increase, cost of goods sold in LIFO method is relatively higher and ending inventory balance is relatively lower. This is because the cost goods sold mostly consists of newer higher priced goods and ending inventory cost consists of older low priced items.
Note: for serialized inventory – the cost of each serial will be used to calculate the COGS.
How can I add a new item to inventory and its inventory valuation method?
You can add accessories, parts or mobile phones items. Just follow the steps below to add any item to inventory:
1. Go to Inventory >> Manage Inventory >> Mobile, Accessories & Parts.
2. Click on the Add Product button.
3. Enter information in each tab of Product Info, Stick, and Prices.
4. From the Prices tab select the inventory valuation method for inventory item. This valuation method will affect the calculation of COGS.
5. Finally, click on Save Item button to add an item to inventory.
Note: There are several ways through which item is added, you need to select valuation method or the system will automatically select weighted average as valuation method.
Inquiry for Item Transactions from Item Master where all purchase, sales, and adjustments can be tracked.
Value of inventory can be seen through inventory summary Report
Inventory Summary Report
Q.How over existing item will be treated once inventory valuation method is deployed?
A. Once inventory valuation is deployed, all the existing item will be marked as a weighted average.
if the item is added from GRN, inventory adjustment and inventory upload, the cost will be updated as a weighted average.
Q. How can I change the Valuation method of Item?
A. Once On hand quantity is zero, only then you can change the valuation method for item.if there is some on hand quantity then the system will not allow changing the valuation method.
Q. Is it mandatory to select the valuation method at the time of item creation?
A. Yes, it is mandatory to select the valuation method, but if you don't select any valuation method system will auto select weighted average.
Q.How valuation method will work in case of Serialized Item?
A. In case of serialized inventory, when user will select an option of manage serials selection of valuation method will be disabled.
Valuation method field is hidden when Manage serialized inventory is Yes.
Inventory Valuation method will have no effect on serialized inventory, as each serial will sold as per its individual price assigned to it.
Note: serialized inventory will be sold as per Cost associated with each serial. Valuation method cannot be added against a serialized item.
Q.In case of inventory transfer which cost will be used in a transaction?
A. In inventory transfer, only quantity is received from other store and weighted average cost of the current store is associated with the transferred item.
Q. Can I sell out of stock item through POS screen?
A.No, you are not allowed to sell out of stock item. You have to make a positive adjustment and add inventory otherwise system will not allow the transaction.
Q. Does iPad support Inventory Valuation method?
A. Yes, iPad doesn't support the inventory valuation method.
Q. Can i create serials for an item who's valuation method is set as lifo,fifo or WACC?
A. when GRN is received against any item against which valuation method is set , and user create serials while creating GRN , that item will be changed to serialized item and valuation method will be changed.
Note: if user adopted FIFO or LIFO valuation method, only items with zero quantity will be updated as LIFO or FIFO valuation method. Those items which have on hand quantity will be added as weighted average. For serialized item valuation method will be disabled.
Below are some of the cases related to Inventory valuation, that how transactions are carried out.
CASE 1: Weighted Average
When item’s valuation is set as Weighted Average.
1. If two items are added into the system, item quantity is added through adjustment with cost=20
Second item is added through GRN with cost=30.
2. Total value of the item will be shown in system under inventory summary report:
3. When new adjustment is made against a current item with different cost weighted average is changed.
New adjustment is added with price cost price=30
Admin history will be updated accordingly.
4. Sales the item, sales invoice will be as following:
5. COGS will be shown in the following report as per weighted average valuation method.
When the item’s valuation is set as Last in First Out.
1. Create new inventory and increased quantity from 0 to 1 through an adjustment with cost price =30
Adjustment log for current item:
2. Received different GRN of the same item at different cost prices.
3. At the time of sales transaction system will sell out the item as per valuation method. As item with cost 60 was added last. so while sales transaction it was sold first.
It can be verified by admin history and the last GRN Created.
4. One more item is added through GRN with cost =80
5. when sales transaction is carried out system will sell item with cost 80 as it was added at last in the system.
It can be verified by Admin history and last GRN Created.
CASE 3: FIFO
When item’s valuation is set as First In First Out.
1. Create new inventory and increased quantity from 0 to 1 through an adjustment with price = 30
2. Adjustment as shown in the report:
3. Received three GRN of same item at different cost.
4. At the time of sales transaction system will sell out the item as per valuation method. As item with cost 30 was added first so while sales transaction it was sold first.
It can be verified through admin history and GRN:
Now you can see due to FIFO Valuation method, Item that is added first is sell out first
5. One more item quantity is added through GRN with cost =80
6. when sales transaction is carried out system will sell item with cost= 50 as it was added first in the system as compared to other item quantity.
It can be verified through admin history and GRN:
You can see due to FIFO Method Item that is added First is sell out first.
CASE 4: Serialized Inventory
In case of serialized inventory when we click on manage serials Selection of valuation method disappears.
In case of serialized inventory every serial may have different cost price and different retail price.
Profit is calculated as per serial cost .each serial has its own cost and profit is calculated accordingly.
1. Created new inventory item
2. Added 5 new quantity through GRN
User can either generate serial at the time of receiving GRN. Price is zero, a user want to have different cost price for each serial.
3. Clicking on create serial will open a popup. Press save and serials will be created.
4. When serials are created against any newly added item, selection of valuation method is disabled for that item.
5. User can give different cost and retail price to each serial.
6. At the time of making transaction system allow us to select which serial we want to sell.
When we select a specific serial cost associated with it will be used for profit calculation.