Inventory Integrations & Valuations
Overview
Because QuickEasy BOS Enterprise is flexible, users are often faced with difficult setup choices. This guide helps users make well-informed choices when setting up their inventory systems in BOS Enterprise.
Specifically, this guide focuses on two issues: Inventory Integration and Inventory Valuation.
Inventory Integration
When setting up BOS Enterprise you can choose to integrate your production system with your accounting system or to keep them separate.
Integrated (Perpetual) System
With an integrated system, all the transactions are posted to the ledger in real time.
Process
- Purchase materials: Entered as Stock on Hand.
- Issue the materials to a job: Transferred the materials from Stock on Hand to WIP
- The job is complete: Transfer the materials from WIP to Cost of Sales, and any remaining materials back to Stock on Hand.
Advantages of an Integrated System
- No month-end procedure: All the entries are entered in real time.
Disadvantages of an Integrated System
- Mismatch between income and expenses: Costs may be recognised before the job is invoiced. This mismatch could distort the gross profit margin.
- Extra ledger transactions: Inventory must be transferred from Stock on Hand to Stock: WIP and then from Stock: WIP to Cost of Sales. When a job is complete, unused stock must be transferred from Stock: WIP back to Stock on Hand.
Periodic System
With a periodic system, all the transactions are posted to accrual accounts. Inventory movements are handled in the respective modules and posted to the Ledger once a month.
Process
- All the Cost of Sales and Inventory entries are posted to Accrual Accounts.
- Once a month, journal entries are made to clear the Accrual Accounts. These entries include:
- Transferring inventory used in production or sold to Cost of Sales.
- Transferring the remainder of inventory purchased to various Stock on Hand accounts.
Advantages of a Periodic System
- Fewer ledger entries: Instead of hundreds of small transactions, there are only a few journal entries.
Disadvantages of a Periodic System
- Periodic journal entries are needed: A bookkeeper must process journal entries to record the Cost of Sales and Inventory. However, the transactions and amounts are provided by reports in BOS Enterprise, which simplifies the process.
- Financial Statements are not updated in real time: Until the periodic journal entries are made, the financial statement is inaccurate. However, a Cost of Sales report shows accurate sales and cost of sales data in real time.
Which Integration Method to Choose?
- Choose perpetual (integrated) if most of your invoicing involves simple processes, such as selling finished goods, or offering a service.
- Choose periodic if your organisation has complex processes, assembles goods for resale, or uses only a portion of an item (e.g. half a reel). The periodic system prevents an abundance of unnecessary entries in your ledger (that your auditors will want to check).
Inventory Valuation
When setting up QuickEasy BOS Enterprise you decide how the inventory price is updated:
- Without an inventory Cost Update, BOS Enterprise does not update the inventory price: you update it yourself.
- With Weighted Average Costing (WAC), you choose between averaging by Location or by Item (all locations).
- With the Last Price method, each receipt sets the price.
- The choice is made per Transaction Type in Setup Cost Update (see How BOS Enterprise Updates the Inventory Price below).
Note
The setting Items & Inventory > Inventory Weighted Ave Costing (N/A, By Location, By Item) has no effect in version 26.07.
Weighted Average Costing (WAC)
WAC calculates the cost of inventory based on the average cost of all similar items in inventory at the time of valuation.
Process
- Sum the Total Cost of all Units in Inventory.
- Sum the Total Number of Units in Inventory.
- Divide the Total Cost by the Total Number of Units to get the Average Cost per Unit.
- Assign this Average Cost to each Unit of Inventory.
Example
- Beginning Inventory: 100 units @ $10 each
- Purchase: 200 units @ $15 each
- Total Cost = (100 x $10) + (200 x $15) = $4 000
- Total Units = 300
- Weighted Average Cost per Unit = $4 000 / 300 = $13.33
Advantages of WAC
| Field | Description |
|---|---|
| It is simpler and easier to use | The WAC averages the cost of all similar units in inventory, making it a quick method for valuing inventory. |
| It evens out price fluctuations | Since the method averages out the costs of goods purchased at different prices, it minimises the impact of price volatility or fluctuations on the cost of goods sold (COGS). |
| It provides consistency | WAC provides a consistent method for valuing inventory over time. |
| It reduces the potential for manipulating the financial statements | Unlike methods such as Last In, First Out (LIFO) or First In, First Out (FIFO), which can be manipulated based on the timing of purchases or sales, the WAC method does not rely on specific transaction timing, making it harder to manipulate reported profits in the short term. |
| It removes the need to track individual units | The WAC method does not require each individual item’s cost to be tracked separately. This method can reduce the complexity of inventory management when dealing with large volumes of similar items. |
Disadvantages of WAC
| Field | Description |
|---|---|
| It does not reflect current market conditions | It may not reflect the true current cost of inventory. |
| It loses specificity | WAC loses the ability to match specific costs with specific inventory items, which could be useful for companies dealing with expensive or unique items. |
| It can distort the financial statements | The averaging process can obscure the financial reality for companies experiencing significant price changes. |
Last Price Method
The Last Price Method values inventory at the cost of the most recent purchase.
Process
- Determine the cost of the most recent Inventory purchase.
- Assign this cost to all Units of Inventory until a new purchase is made.
Example
- Purchase 1: 100 units @ $10 each
- Purchase 2: 200 units @ $15 each
- Inventory Value = 300 units @ $15 each (assuming the last purchase is the latest cost)
Advantages of Using the Last Price Method
| Field | Description |
|---|---|
| It can bring tax benefits during inflation | If prices rise, the Last Price Method method deducts the higher cost of items thereby reducing the organisation's profitability and its tax. |
| It more accurately measures current costs | The Last Price Method more accurately reflects the current market conditions, because it uses the latest prices. |
| It acts as a natural hedge against inflation | The Last Price Method accounts for the most recent (higher) prices which means the rising costs of goods are immediately reflected in COGS, which can help protect profit margins from the negative impact of inflation. |
Disadvantages of Using the Last Price Method
| Field | Description |
|---|---|
| It is not globally accepted | This method is not accepted under the International Financial Reporting Standards (IFRS). |
| It obscures the true value of inventory |
|
| It can distort the financial statements | In times of declining prices or when inventory costs are dropping, the Last Price Method can result in lower inventory values and understated profits because the latest, lower-cost items are considered sold first. |
| It increases volatility in earnings |
|
Which Valuation Method to Choose?
The Last Price Method should only be used if your inventory prices have risen dramatically and you need the tax break.
In all other cases, the Weighted Average Method gives a more balanced view of your organisation's financial performance. It can also improve your organisation's financial standing because this valuation method is globally accepted.
How BOS Enterprise Updates the Inventory Price
- Each item has an inventory price (unit cost) per location, in the home currency and the item's base unit.
- A location's price is only updated automatically when its Auto Update is checked (on the item's Inventory tab, or in Pricing > Inventory Prices).
- A new location starts with the item's price at another location, or else its cost price, supplier price or 0.
Setup Cost Update
Each row links a Transaction Type and a status to an update. When a transaction of that type moves to that status, its item lines update the price:
| Update | What happens |
|---|---|
| Inventory (Last Price) | The item's price at every location with Auto Update becomes the line's unit price. |
| Inventory (Average Price) | The weighted average over all the item's locations; every location with Auto Update gets the new price. |
| Inventory by Location (Average Price) | The weighted average at the line's location only. |
| Supplier Price and Cost Price options | Update the item's supplier or cost price, not the inventory price. |
How the Average Is Calculated
- The line's unit price is taken excluding VAT, converted to the home currency and to the item's base unit.
- The stock already held is the quantity In Stock on the day before the transaction date (at the location, or at all locations).
- New price = (stock held x current price + quantity received x unit price) / (stock held + quantity received).
- If no stock is held, or stock is negative, the received price becomes the price.
- Changing a line's total while the transaction is in that status updates the price again.
Info
- Later receipts are not averaged again when a receipt is back-dated or its date changes.
- Stock checks do not change the price.
- Rebuild All on the Inventory screen rebuilds stock quantities only, not prices (see Stock Quantities).
Updating Prices Manually
In Pricing > Inventory Prices, select the locations and use the Menu (see Inventory Prices):
- Update to last Goods Received Price / last Purchase Price / Supplier Price / Cost Price: Copies that price, when it is greater than zero.
- Update Prices - Weighted Average - Last Month / This Month: Calculates the average for the period: the opening value plus the receipts less the issues, divided by the closing quantity. If the closing quantity is 0, the price becomes 0.
- Each update asks for confirmation, and then the message "<n> record/s were updated." appears.
Price History
- Every change to the inventory price is kept in the item's Price History tab (filter Stock Price), with the old and new price, the date, the user, the transaction and the location.
- Only administrators can delete price history, after the warning that it is used to value inventory on historic reports.
Where the Inventory Price Is Used
- Transaction Types with the pricing Inventory Issue price their lines at the inventory price on the transaction date.
- The Inventory screen values stock at the current price, or with a date filter at the price on the opening and closing dates (see Inventory Default View).
- The price on a past date is the latest price history entry on or before that date; without history, the current price is used.