Average Cost Rules

Accolent ERP uses Average Cost as the method of accounting for all capitalized transaction costs for each inventory product. The Average Cost of a product reflects the cumulative cost of that product divided by the ending quantity of the product. Transactions that involve a product will update the product’s ending quantity and Average Cost, which may or may not change depending on the type of transaction. Receipts of POs usually result in a change in a product’s Average Cost, while sales transactions do not affect a product’s Average Cost. The system can accomodate a product having a negative ending quantity. This is obviously not a real situation but may occur, for example, where a product has been received but not yet updated in the system.

Definitions

  1. BEGINNING AVG COST – is the Average Cost of a product prior to the transaction.
  2. ENDING AVG COST – is the Average Cost of a product after the transaction.
  3. BEGINNING QTY – is the quantity (“QOH”) of a product prior to the transaction.
  4. ENDING QTY – is the QOH of a product after the transaction.
  5. TRANSACTION QTY – is the quantity of the product in the transaction being considered.
  6. AVERAGE COST RULE – transactions affect a product’s Average Cost according to this rule: ENDING AVG COST is calculated as: [(BEGINNING QTY x BEGINNING AVG COST) + (TRANSACTION COST)] / (BEGINNING QTY + TRANSACTION QTY).

Product Initialization

  • When an Inventory Product is saved, the system requires the entry of Standard and Alternate Costs.
  • In the case of a Product-on-the-Fly added to an order, the system sets the BEGINNING AVERAGE COST to be equal to the Standard Cost entered.

PO Transactions and Exceptions

  • The term “PO Transactions” includes POs, PO Adjustments, and Inventory Adjustments.
  • For all PO Transactions the AVERAGE COST RULE uses TRANSACTION COST = PO COST and the TRANSACTION QTY = PO QTY (positive).
  • PO COST is equal to the unit cost charged for a product on a PO multiplied by quantity on the PO plus the ALLOCATED LANDED COST for that product.
  • ALLOCATED LANDED COST – Landed Costs apply to a PO in total and are allocated to products according to a selected method of allocation (i.e., Extended Price, Weight, Cubes).
  • EXAMPLE – If a product has BEGINNING QTY of 100 EA, BEGINNING AVG COST of $50.00 and a PO is received with PO QTY of 20 EA and unit cost of $52.00/EA and ALLOCATED LANDED COST of $160.00, then ENDING AVG COST = [(100 x $50.00) + (20 x $52.00) + $160.00] / (100 + 20) = $51.67.
Exceptions
  • If (AND ONLY IF) the BEGINNING QTY of a product received on a PO is negative, the ENDING AVG COST is equal to the PO COST divided by the PO QTY. In addition, a Write-Off equal to the BEGINNING QTY (negative) multiplied by the difference between the ENDING AVG COST and the BEGINNING AVG COST is made. If the Write-Off is negative, it Debits COGS and Credits INVENTORY. If the Write-Off is positive the GL Posting is reversed.

Sales Transactions and Exceptions

  • The term “Sales Transactions” includes Invoices, Unconfirms and Credit Memos.
  • For all Sales Transactions, the AVERAGE COST RULE uses TRANSACTION COST = SALES COST and the TRANSACTION QTY = SALES QTY (negative).
  • The AVERAGE COST RULE is applied across the board even for Unconfirms and Credit Memos that derive from a prior invoice; in particular, we do NOT try to match the transaction cost for Unconfirms or Credit Memos to the original invoice.
  • SALES COST is equal to the beginning Average Cost for a product multiplied by the SALES QTY of that product; so, the beginning and ending Average Cost on a sale will be the same.
  • EXAMPLE – If a product has BEGINNING QTY of 100 EA, BEGINNING AVG COST of $50.00 and a sale is invoiced with SALE QTY of -20 EA, then ENDING AVG COST = [(100 x $50.00) + (-20 x $50.00)] / (100 – 20) = $50.00.
Exceptions
  • If the sales transaction is a Special Order, then the SALES COST is the same as the PO COST on the linked PO.
  • Miscellaneous Products that are marked as Special Order products are covered by this exception.

Inventory Adjustments and Exceptions

  • Inventory Adjustments do not change Average Cost but adjust ENDING QTY to an entered value. So, ENDING AVG COST always equals BEGINNING AVG COST. In addition, there is a Write-Off equal to: [(ENDING QTY – BEGINNING QTY) x ENDING AVG COST]. If the Write-Off is negative, the GL Posting is to Debit Expense and Credit Inventory. If the Write-Off is positive the GL Posting is reversed.
  • EXAMPLE – If a product has a BEGINNING QTY of 100 EA, BEGINNING AVG COST of $50.00, and an Inventory Adjustment is made for -5 EA, then ENDING QTY is 95 EA and ENDING AVG COST is $50.00. Since the write-off is negative, it Debits Expense and Credits Inventory for (5 x $50.00) = $250.00.
Exceptions
  • None.

Average Cost Adjustments and Exceptions

  • Average Cost Adjustments change Average Cost to an entered value, but do not change BEGINNING QTY. So, ENDING AVG COST is entered and there is a Write-Off equal to: [(ENDING AVG COST – BEGINNING AVG COST) x BEGINNING QTY]. If the Write-Off is negative, the GL Posting is to Debit Expense and Credit Inventory. If the Write-Off is positive the GL Posting is reversed.
  • EXAMPLE – If a product has a BEGINNING QTY of 100 EA, BEGINNING AVG COST of $50.00, and an Average Cost Adjustment is made to change the Average Cost to $48.00, then ENDING QTY is 100 EA and ENDING AVG COST is $48.00. Since the write-off is negative, it Debits Expense and Credits Inventory for (100 x $2.00) = $200.00.
Exceptions
  • None.

Conversion Transaction Rule and Exceptions

  • The term “Conversion Transactions” includes Bills of Materials and Finished Kits.
  • Conversion Transactions create a finished product from a defined list of components. (Note: Finished products may also be purchased on a PO and then are treated just as any other non-BOM products). Needs to be added.
  • For all Conversion Transactions the AVERAGE COST RULE uses TRANSACTION COST = CONVERSION COST and TRANSACTION QTY = CONVERSION QTY (positive).
  • The CONVERSION COST is the total cost of all of the components (at the time of conversion) used to create the converted quantity of the finished product and is calculated as [(Qty1 x Avg Cost1) + (Qty2 x Avg Cost2) + ….. + (Qtyn x Avg Costn)], where the subscripts denote the components used.
  • The CONVERSION QTY is the final usable quantity (excluding wastage) of the finished product created as a result of the conversion.
  • EXAMPLE – A BOM creates a CONVERSION QTY of +1 EA Finished Product from 2 EA of Component C1 and 1 EA of Component C2, that have Average Costs prior to the reverse BOM of $70.00 and $30.00 respectively. Then the CONVERSION COST of the Finished Product is: [(2 x $70.00) + (1 x $30.00)] =$170.00.
  • The GL Posting of a Conversion Transaction is done in 2 steps for a Bill of Materials and in one step for a Finished Kit.
    • BOM:
      • Upon Creation of Batch, Debit Finished Product WIP Inventory and Credit Inventory of BOM Components.
      • Upon Finishing of Batch: Debit Inventory of Finished Product and Credit WIP Inventory of Finished Product.
    • Finished Kit: Debit Inventory of Finished Product and Credit Inventory of Kit Components.
Exceptions
  • None.
  • There is a validation that blocks any BOM component quantities from being negative.

Reverse Conversion Transactions Rule and Exceptions

  • The term “Reverse Conversion Transactions” refers to the disassembly or break down of a finished product through a Bill of Materials or a Finished Kit.
  • Reverse Conversion Transactions create a list of components from a finished product that is disassembled. Reverse Conversion Transactions are effected by entering negative quantities of the finished product in a BOM or Finished Kit.
  • For all Reverse Conversion Transactions, the AVERAGE COST RULE uses TRANSACTION COST = CONVERSION COST and TRANSACTION QTY = CONVERSION QTY (negative).
  • The CONVERSION COST is the quantity of the finished product being disassembled multiplied by the Average Cost (at the time of conversion) of the finished product.
  • The CONVERSION QTY is quantity of the finished product disassembled in the conversion.
  • The CONVERSION COST is allocated to each recovered component by multiplying the total CONVERSION COST by each component’s “Disassembly Ratio” to create each component’s “CONVERTED AVG COST.” Each component’s Disassembly Ratio is calculated as the extended Average Cost of that component divided by the sum of the extended Average Costs of all the recovered components [(Qty1 x Avg Cost1) + (Qty2 x Avg Cost2) + ….. + (Qtyn x Avg Costn)], where the subscripts denote the components recovered.
  • EXAMPLE – A reverse BOM with a CONVERSION QTY of -1 EA and an Average Cost of $185.00, yields 2 EA of Component C1 and 1 EA of Component C2, that have Average Costs prior to the reverse BOM of $70.00 and $30.00, respectively. Then the CONVERSION COST is -$185.00. The Converted Avg Cost of Component C1 will be (2 x $70.00) / [(2 x $70.00) + (1 x $30.00)] x $185 / 2 = $152.35 / 2 = $76.18. Similarly, the Converted Avg Cost of Component C2 will be (1 x $30.00) / [(2 x $70.00) + (1 x $30.00)] x $185 / 1 = $32.65. The Average Cost of the reverse BOM of $185.00 creates 2 EA of Component C1 at $72.18 and 1 EA of Component C2 at $32.65.
Exceptions
  • None.

 

 

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