This chapter explains how inventory value affects work in process and how it is properly established and maintained.
Inventory value is an average cost based on Receipt costs (PO Receipts and Job Receipts)
Inventory value is always an average cost based on the value of PO Receipt costs and Job Receipt costs averaging with existing quantities on hand.
Item inventory values directly affect work in process
Item inventory values directly affect work in process because raw materials, purchased components, and subassemblies are issued to jobs at their unit Inventory Cost, which is an average cost. It is therefore vitally important that each item is given a realistic unit cost at time of receipt to properly update its unit Inventory Cost.
Assign all PO lines a realistic supplier price
Purchased items are received to inventory in real time at the PO unit cost, which is translated from the supplier price. Supplier invoice matching, which often occurs well after items are received and issued to jobs, does not update PO costs after-the-fact. It is therefore essential that all PO lines are assigned a supplier price at time of PO generation to establish a realistic inventory cost.
Receive finished items at a realistic cost
When finished items are received to inventory in the Job Receipts screen, always make sure the unit cost is realistic, meaning that it is within acceptable range to the estimated job cost and is not affected by an obvious costing error.
Never make journal entry adjustments to your Inventory account
Never make journal entry adjustments to your Inventory account. This is a self-adjusting account that is always fully reconciled with the total inventory value of stock on hand. Two screens can be used to adjust the Inventory account balance:
Change Inventory Cost
The Change Inventory Cost screen is used to change an item’s Inventory Cost. This is used to correct the value of stock on hand when an obvious costing error has been discovered after receipt transactions have been made.
NOTE: This screen only corrects the value of stock on hand and does not correct any past transaction costs.
Reconcile Book Values
The Reconcile Book Values screen is used to adjust total inventory value to account for decimal rounding discrepancies between inventory transaction costs, which are made with five decimal places, and GL posting amounts, which are made with two decimal places.
If you have been making journal entries to your Inventory account
If you have been making journal entries to your Inventory account, stop doing so from this point forward. Run the Inventory Value report to determine your actual inventory value and compare that value with your current Inventory account balance.
If the report value differs from the account balance, calculate the difference and make the following one-time journal entry for the difference amount to get the Inventory account correctly established so that it can be self-adjusting from this point forward.
If the report value is greater than the account balance:
Debit 12000 Inventory
Credit 53100 Adjustments – Inventory
If the report value is less than the account balance:
Debit 53100 Adjustments – Inventory
Credit 12000 Inventory
After making this one-time journal entry, cease making any journal entry adjustments to the Inventory account from this point forward.
