Costing Method
Costing Method is applied to items in the Item Master in the 'COSTING METHOD' column; Costing Method is the way that inventory ending costs are calculated.
Only approved Invoices contribute to the cost. If your costing method is Last Cost, the cost on an Invoice for items received today will not be used until that Invoice is approved. Until that point, the previous approved invoice cost will be used.
What types of items are assigned a costing method?
Standard, Prepared, Generic and Internal item types need to have a costing method applied. Recipes are automatically assigned a costing method of ‘Recipe Cost’ and cannot be changed
What is weighted average?
Weighted average is calculated by dividing the total dollar value of the beginning inventory and purchases by the total count of the beginning inventory and purchases
| Count | Cost | Ext Cost | |
|---|---|---|---|
| Beginning | 5 | $10 | $50 |
| Purchases | 2 | $20 | $40 |
| Ending | 4 | Calculated Below |
| Total value of beginning and purchases = | $90 | = $12.85 | ||
| Total count of beginning and purchases = | 7 |
$12.85 is used to calculate the ending Ext Cost
| Count | Cost | Ext Cost | |
|---|---|---|---|
| Ending | 4 | $12.85 | $51.40 |
What is FIFO?
FIFO assumes that items in the beginning inventory are used before the purchased items
| Count | Cost | Ext Cost | |
|---|---|---|---|
| Beginning | 5 | $10 | $50 |
| Purchases | 2 | $20 | $40 |
| Ending | 4 | Calculated Below |
- The ending count is 4 – that count includes 2 @ $20 (from purchases) and 2 @ $10 (from beginning)
- The usage of 3 is depleted at the beginning cost because the beginning count was in the unit before the purchase
| Count | Cost | Ext Cost | |
|---|---|---|---|
| Ending Count of 4 = | 2 | $20 | $40 |
| 2 | $10 | $20 |
| Total value of ending count = | $60 | = $15 | ||
| Total ending count = | 4 |
$15 is used to calculate the ending Ext Cost
| Count | Cost | Ext Cost | |
|---|---|---|---|
| Ending | 4 | $15 | $60 |
FIFO takes into account previous inventory only if sum of all documents (invoices in this case) between previous and current inventories is less than current total inventory quantity.
If there is no current inventory, cost for FIFO method will be taken in following sequence:
- From latest approved document
- From previous approved inventory
- From standard cost
What is last cost?
Last Cost uses the last cost that the item was purchased at to value all of the ending inventory ($20 in this example, making the Ext cost $80)