Before Standard Unit Cost is updated in Accounting Seed, users should run a report on the quantity available by product on the inventory balance and compare this to the quantity available in the general ledger. An inventory adjustment should be made to synchronize any differences between the quantity available for the product in the general ledger and the inventory balance before an update of standard cost is done. See Report on and Reconcile Inventory for more details.
Update Standard Unit Cost
The unit cost for a product should be updated to better match market values periodically, and should always be done in the base currency of your organization. Accounting Seed recommends reviewing your products’ standard cost at least once every 3-12 months.
- Run a report to verify that all Purchase Orders that have been received also have the related Payables created and posted to the general ledger. If standard cost is updated prior to this being done, then the related Vouchers Payable GL account will be out of balance. This is because receiving inventory and creating a Payable for that inventory create related accounting transactions in the general ledger
- Receive Inventory
- DR Inventory $XXX
- CR Vouchers Payable ($XXX)
- Create/Post Payable for Inventory
- DR Vouchers Payable $XXX
- CR Accounts Payable ($XXX)
- For more information on the flow of transactions and processes in Accounting Seed’s inventory process around receiving inventory and recording payables for inventory, please refer to our Payables for Inventory Map.
- Run another report to verify that all Billings in the prior period are posted. If you update the standard cost prior to this being done, then the related cost-of-goods-sold calculation for that prior period will be affected. For more information on the flow of transactions and processes in Accounting Seed’s inventory process around billing inventory, please refer to our Billing for Inventory Map.
- Create Inventory Quantity Available History records for the last date of the prior period:
- Create Inventory Quantity Available History records for ALL Inventory Quantity Available (“IQA”) records. If you have more than 200 IQA records, then tab to the next page to select the next 200 records. Continue doing this until you have done this for all IQA records.
This process can be done at any point in time and does not have to happen on the last day of the prior period.
- Run an Inventory Quantity Available Histories report as of the last date of the prior period and add in your existing inventory’s Standard Cost-Per-Unit information. For further details, see Report on and Reconcile Inventory.
- Run a Balance Sheet/Trial Balance for this same accounting period. Compare the number from step 3b to the amount reflected in Inventory per the Balance Sheet. These two amounts should match. If they don’t match, you will want to first reconcile this.
- If you will be updating a product’s standard unit cost where there is available quantity on the Inventory Quantity Available Histories report, then an adjusting journal entry will need to be recorded to reflect this change in the product’s standard unit cost. The reason is that as these products are sold, the value coming out of the inventory GL account will be based on the new unit cost, which will be different from what the original inventory was recorded at when received and paid. The adjusting journal entry will account for this in accordance with generally accepted accounting principles (“GAAP”).
- The difference between the new unit cost and the old unit cost times the quantity will be the amount entered into the adjusting journal entry
[(New Unit Cost - Old Unit Cost) * Quantity].
For example, if the new unit cost is $6/unit and the old unit cost is $5/unit and there are 10 of these products in inventory as of the end of the prior period, then a journal entry would then be to debit inventory for $10 and credit cost of goods sold for $10. The following Journal Entry would then be recorded:
- DR Inventory $10
- CR Cost of Goods Sold ($10)
- As these products are sold, the system will process a debit to cost of goods sold for $6 and a credit to inventory for $6.
- As illustrated in the example above, if the unit cost is increased, the Journal Entry should debit inventory and credit cost of goods sold. Likewise, if the unit cost is decreased, the Journal Entry should debit cost of goods sold and credit inventory. This entry should be dated on the 1st of the month following the Inventory Balance History report. (For example, run history report dated 12/31/18 and post this Journal Entry on 1/1/19.)
- It is best practice to have two Journal Entry Lines per product. For example, if updating 10 products, then the Journal Entry will have 20 Journal Entry Lines and each line will be tagged to the specific product that is being updated. This will help with any reconciliations.
The recommendation on this article to perform an inventory adjustment to bring the GL in line with the Inventory balances makes the assumption that the GL is correct.
In my experience, it is just as likely (or even more likely) that it is the quantity in the GL that is incorrect and the Inventory Balance that has the correct quantity which has to be corrected with a Journal entry (or a correction to the transaction that generated the discrepancy, if you are able to research that deeply).
For a change in standard cost, as well as for month end inventory reconciliations, it would be more correct to advise doing a physical count of the inventory balances, and/or an analysis of whether all SO that have been billed have also been allocated, before determining what adjustments need to be made and whether that adjustment should be an inventory adjustment (or clearing up a missing/forgotten allocation) to bring the Inventory Balance in line with the GL, or a journal entry (or posting a forgotten Billing) to bring the GL in line with the Inventory Balance.
Is this article referring to Standard Cost or Price? Two very different things, cost being our cost of the product, price being what the customer pays us.
I think Acct Seed confuses these two words and it causes confusion amongst our users. Salesforce refers to "Price Books" and "Standard Price" book in regards to quoting and customer sales process, so that should remain how Acct Seed refers to it in the customer facing records like sales order lines, and cost should be used separately on Product object for adding our costs and PO lines which are our costs.
Can you clarify what this article is speaking in regards too? Thanks!
The article is speaking about cost. The cost you pay is the "price" your vendors charge you at. This is completely separate than Price Books, which you have defined correctly as the price you charge your customers.
Thanks Tony, yea I think referring to them as 2 different things our "cost" = vendor "price" even though they are the same is what is confusing. I put in a feature request to make the syntax correct and consistent. Even though Acct Seed doesn't deal directly with price book entry, price books, standard price I think it makes sense to use that work "price" for all customer facing amount labels and "costs" for our procurement amount label, especially on PO lines.
Thanks for the quick response!
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