Vendor invoice recording (Part 3)

Tags

, , ,

This post extends the previous one in a way that this time a project related expense invoice is recorded and posted. The major difference to the example shown in the previous post is related to the expenditure reviewer setup that needs to be made in a separate project distribution tab, which is illustrated in the next screen print.

205_p3_0005

Please note that the setup of the ‘orderer’ expenditure reviewer group is made in the same way that has been shown for ordinary expense related invoices in the organization distributions tab.

The setup of the ‘approver’ expenditure group differs from what has been shown in the previous post because the project manager is now defined as the responsible person for approving the vendor invoice. For details, please see the following screen print.

205_p3_0010

Please note that the sample invoice recorded below is for project no. 000188, which has Kevin Cook assigned as the project manager.

205_p3_0015

Also note that Kevin Cook is not a line level manager of Nicole Holiday who once again ordered the goods. This can be identified from the next organizational chart.

205_p3_0020

Against the background of all this information, another expense invoice for advertising materials is recorded in the pending vendor invoice form.

205_p3_0025

This time, with a project is specified in the project invoice line details tab.

205_p3_0030

The financial dimensions invoice line tab is filled with the same financial dimension values that have been used in the prior post. That is, Nicole Holiday – the worker who ordered the goods – is recorded in the financial worker dimension field and cost center 008 – that has Benjamin Martin assigned as the cost center owner – is recorded in the financial cost center dimension field.

205_p3_0035

Because of the project relationship, the respective project manager (Kevin Cook) and not the cost center owner is identified as the one who has to approve the vendor invoice before it can be posted. The next screen print illustrates this.

205_p3_0040

As the remaining process steps are identical to what has been shown in the previous post, they are skipped here for reasons of brevity.

The next post will build upon this one and illustrate how different signing limits can be incorporated into the vendor invoice workflow. Till then.

Vendor invoice recording (Part 2)

Tags

, ,

Within this second part of the series on vendor invoice recording, we start with a process where a marketing employee (Nicole Holiday) orders some marketing materials via Email.

After the materials have been received by Nicole Holiday, the vendor invoice arrives and is manually entered in the pending vendor invoice form. After recording all invoice related data, the AP clerk initiates the invoice workflow.

Within the first workflow step, the one who ordered the materials (Nicole Holiday) needs to review the invoice and confirm that all ordered materials arrived in good condition.

Thereafter, the cost center manager (Benjamin Martin) needs to approve the expense amount before it can be posted and paid later on.

The next flowchart summarizes the different process steps that will be investigated in more detail from a Dynamics AX/365 for Operations perspective.

205_p2_0005

The following organizational chart highlights the employees/positions involved in the process in light brown color. Note that this chart will also be used for the subsequent posts on vendor invoice recording.

205_p2_0010

Based on findings that have been made by other Dynamics AX/365 for Operations experts – please see the following post / video – the invoice approval workflow has been set up in a way that makes use of two different expenditure reviewer groups.

The first expenditure reviewer group – denominated as orderer – thereby makes reference to the financial dimension worker and automatically assigns the workflow work-item task to the worker specified in the financial dimension worker field. For details, please see the following setup.

205_p2_0015

warningsignganzklein Getting the invoices correctly assigned to the person who ordered it, requires setting up all employees with their own financial dimension. In addition, each employee must be specified as the owner of this financial dimension because the financial dimension owner defines the person who has to review the vendor invoice. The next screen print shows this setup for Nicole Holiday who ordered the marketing materials.

205_p2_0020

The second expenditure reviewer group – denominated as approver – references the cost center financial dimension.

205_p2_0025

The person responsible for approving the invoice is consequently the one that is setup as the owner of the respective cost center. In the example illustrated, this is Benjamin Martin as the head of cost center 008.

205_p2_0030

warningsignganzklein It is the financial dimension owner and not the manager of the corresponding operating unit that is referenced through the expenditure reviewer group.

warningsignganzklein The way how the setup is made requires that the expense invoice is entered with the financial dimension worker, which defines the orderer who is responsible for verifying that the ordered materials arrived. In addition, the respective cost center needs to be entered because it determines the manager that is responsible for approving the invoice.

 

After describing the elements required for the invoice workflow, let’s have a look at the different workflow steps and the overall setup of the sample workflow used in this post, which is illustrated below.

205_p2_0035

The following two screen prints show the setup of the first workflow step (review invoice) that requires Nicole Holiday reviewing whether all materials have been delivered by the vendor. Please note that Nicole holiday is not directly addressed in the first workflow step but rather the workflow participant ‘orderer’. As the expenditure reviewer group ‘orderer’ links to the financial dimension ‘worker’, the person who ordered the materials needs consequently be entered in the financial dimension worker field at the time the invoice is entered. This will be shown further below.

205_p2_0040 205_p2_0045

The second workflow step – the invoice approval step – is also assigned to a workflow participant. This time, the approver, as illustrated in the next screen prints.

205_p2_0050 205_p2_0055

With this setup in place, let’s record the expense invoice for the marketing materials. The next illustration shows the vendor invoice recording, which makes use of the ‘advertising’ procurement category that defines the ledger account that will be used for posting the invoice.

205_p2_0060

warningsignganzklein Please note that the orderer (Nicole Holiday) is entered in the financial dimension worker field. The person that needs to approve the invoice is determined by the owner of the cost center entered in the cost center financial dimension.

205_p2_0065

After all invoice details are entered, the workflow process is started by the accountant Phyllis Harris. Based on the workflow setup, Nicole Holiday is the first one that gets a workflow item-task assigned. Please see the next screen print.

205_p2_0070

If Nicole opens the assigned work item, she can inspect the invoice recorded by the AP clerk. Provided that everything is ok, she can then complete her review task.

205_p2_0075

warningsignganzklein If Nicole Holiday rejects the review, the invoice will be returned to the AP clerk who can then clarify with the vendor how to deal with the invoice received. Provided that the invoice is unjustified, the AP clerk has the option to recall the workflow and delete the record from the pending vendor invoice form until a new or corrected invoice from the vendor arrives. Another available workflow action for Nicole is to delegate the workflow task to another user who will then become responsible for finalizing the invoice review workflow step.

Once Nicole has completed her review task, the workflow assigns another work-item to Benjamin who has to approve the amount to be spend.

205_p2_0080

Benjamin can similarly choose among different workflow actions, such as approve, reject, etc.

205_p2_0085

warningsignganzklein In addition to approving the invoice Benjamin Martin has the option to reject the invoice, which returns it to the AP clerk – the workflow originator – who can then decide how to proceed. Delegating the approval step assigns the invoice approval to another user. The same applies to the request change workflow action, which allows specifying a user that has to make some changes – for example to the sales tax – before the invoice workflow can continue.

Once Benjamin Martin approved the expense invoice, all workflow steps are completed …
205_p2_0090

… and the invoice becomes available for posting.

205_p2_0095

warningsignganzklein Provided that all invoice details have already been entered in the first place and against the background that the invoice has been reviewed and approved by two different people, it can be posted automatically from the author’s perspective, which can be realized by including an automatic posting step in the workflow. The next screen print illustrates this.

205_p2_0100

Posting the vendor invoice ends this second post on vendor invoice recording. The next posts will successively extend the sample invoice workflow process illustrated here. Till then.

Vendor invoice recording (Part 1)

Tags

, ,

Over the last couple of years, I have seen a lot of different ways how companies record and process their vendor invoices. Some people I talked to about vendor invoice processing mentioned that the standard invoice recording tools would not be sufficient, others stated that they are too complex and even one time I was confronted with the statement that the standard tools cannot be used because ‘everybody’ says that they are not mature enough. Many of those people resp. companies ended up implementing expensive software add-on’s that often had their own problems and required some customizations in the form of interfaces and alike. Against the background of those statements, I will illustrate within this and the following posts how expense and purchase order related vendor invoices can be processed in the standard Dynamics AX/365 for Operations application.

warningsignganzklein Expense related vendor invoices are those for which no purchase order has been created and that are consequently not matched against product receipts.

The aim of this series is not to backfire on those previous – sometimes quite offensive – statements I was confronted with but rather to carve out the advantages and disadvantages, strength and weaknesses of the standard invoice recording tools in order to allow you making your own assessment.

Before we dig into the details, I would like to mention that all of the following illustrations and explanations will make use of what I call the vendor invoice ‘workbench’, that is, the ‘pending vendor invoice form’. Vendor invoice journals, vendor invoice register journals and invoice approval journals won’t be used at all because of the following reasons:

  1. The invoice workbench provides a single point of entry for entering expense related and purchase order related invoices.
  2. Entering vendor invoices through journals does not make use of the subledger accounting framework. As a result, important invoice audit functionalities are simply not available. For details, please have a look at this prior post
  3. Project related expense invoices that are recorded through journals are not considered as committed project cost. As a result, project costs might be observed too late, resulting in wrong decision makings and project analysis. For details, please have a look at the following post.
  4. The vendor invoice workbench allows recording project related intercompany expenses that cannot be recorded through the different invoice journals. What is more, intercompany projects automatically create intercompany invoices in the vendor invoice workbench. Using journals for recording vendor invoices consequently result in a situation where companies have to differentiate between (a) ordinary expense related invoices, (b) purchase order related invoices and (c) project related intercompany invoices and record them in different forms in Dynamics AX/365 for Operations.

Recording vendor invoices through the invoice workbench does also have some disadvantages, such as:

  1. That fact the value added tax included in the invoice amount will be posted later compared to posting it at the time the invoice is registered in the invoice register journal. This timing difference can result in cash flow related opportunity costs if the tax is deduced in future financial periods. Even though this statement is true, I have not seen many companies posting the value added tax at the time vendor invoices are registered. In addition, if the vendor invoice throughput time is short, the time difference argument falls short.
  2. That accountants who are used to recording expenses directly on ledger accounts have to relearn how they record vendor invoices. That is because the vendor invoice workbench does not allow entering ledger accounts directly but rather makes use of so-called procurement categories. The following figure illustrates an expense invoice for advertising expenses, where the ledger account that is assigned to the procurement category can be observed only indirectly through the accounting distribution form.
    205_p1_0005
    I made the experience that this last point is often the biggest hurdle that prevents people from using the vendor invoice workbench. From the authors perspective this second point is regularly used only as an excuse that is brought forward in order to prevent changes to familiar business processes. As an example, the argument that procurement categories do not provide users with an indication of the ledger account that will be used for posting can be overcome by including or adding the account number in the procurement category name.

The next posts will focus on expense related vendor invoices and how they can be entered and processed through the invoice workbench in Dynamics AX/365 for Operations. Thereafter, entering and processing purchase order related invoices will be illustrated before this series will conclude with a summary of the advantages/disadvantages, strength and weaknesses of the standard vendor invoice processing functionalities.

Make yourself heard

Tags

, ,

Recently, Microsoft launched this new website, which allows us helping to improve Microsoft Dynamics 365 and its family of products and solutions by discussing ideas, providing suggestions and giving feedback.

This site offers a great opportunity for all Dynamics community members to make their ideas and suggestions heard and/or to vote for features that have already been suggested by others.

The ideas and suggestions that get the most votes are likely to be built into future versions of the Dynamics 365 product family. Even though there is no guarantee that one’s idea will be realized, there is absolutely no chance that it will be considered if you do not make yourself heard and use this platform.

That’s why I would like to ask you to make use of the newly released site, not only to bring your own ideas forward but also to vote for other already existing ideas in order to make the Dynamics 365 product family even better in the future.

My personal current favorite finance & accounting related ideas are

  1. Address selection for collection letters
  2. Customer lump-sum depreciation of overdue customer positions (invoices)
  3. Foreign currency revaluation cash and bank management module
  4. Secure attachments for certain groups of users or security roles
  5. Single voucher per expense report
  6. Financial Reporting using Chart of Accounts translated descriptions
  7. Parallel / Multiple inventory valuation
  8. Provide ability to restrict ‘Project Stages’ by Security Roles or controlled by Workflow

Do you have other or better ideas?
Then share them on https://ideas.dynamics.com/ideas/ or vote and comment on already existing ones, such as the ones I listed above.

Many thanks for your support and helping making the Dynamics 365 product family better.

Parallel inventory valuation – an alternative approach (Part 5)

Tags

, , , , , ,

As the other remaining production related standard cost variances are treated in a similar way as the previously analyzed lot size variance, they are analyzed together in this post. In order to get a price, quantity and substitution variance posted, the following modifications have been made to the standard production process for the item that has already been used in the prior post.

 

  1. Instead of consuming one raw material, two pieces of the raw material are consumed, which results in a quantity variance of $500.
  2. The standard cost price of the raw material has been increased from $500 to $515 prior to the start of the production order. This gave rise to a price variance of
    2 pcs x ($515-$500) = $30
  3. The route card was posted with a different route version, which had a different (more expensive) cost category price setup ($600 instead of $490). This change resulted in a substitution variance of $110.

 

warningsign1 Other common sources of standard cost variances are described on the following website: https://technet.microsoft.com/en-us/library/gg213654.aspx

 

The next screen print illustrates the total production costs of $1640 and the different standard cost variances for the sample production order processed.

203_p5_0005

As before, the next accounting overview summarizes the generated ledger transactions.

203_p5_0010

warningsign1The grey highlighted lines offset each other and can thus be ignored for the analysis of the production costs.

 

For those readers who are not very familiar with ledger postings, the following financial statement overview has been prepared.

203_p5_0015

The financial statement overview presented above shows that the total inventory balance of the produced item ($1000) is too low from an actual costing perspective ($1640). For that reason, an allocation of the price, quantity and substitution variance similar to what has been shown in the previous post for the lot size variance is required.

Applied to the example shown above, the complete price, quantity and substitution variance amounts would have to be shifted to the company’s balance sheet by making use of an allocation rule. That is because only a single receipt transaction but not issue transaction has been recorded thus far. If also issue transactions would have been recorded, a separation and allocation of the different variance amounts would be required. The setup and application of this allocation rule is not shown here to conserve space and because it follows the same concept that has been explained in the prior posts.

 

Summary:
This and the previous posts demonstrated that companies that make use of a standard cost inventory valuation can obtain a parallel inventory value that is based on actual costs by applying general ledger allocation rules for the different standard cost variances.

The next graph summarizes the different standard cost variances and illustrates how they need to be treated to arrive at a parallel inventory value.

203_p5_0020

The graph above differentiates between the different standard cost variances based on whether they arise internally (cost revaluation and cost change variance) or whether they have an external market relationship.

External market relationship in this context refers to the purchase market, which gives raise to the purchase price variance in case items are purchased and to the sales market, which relates to the produced items once they are sold.

As explained before, the ‘internal’ standard cost variances need to be eliminated, that is, shifted from the company’s income statement to its balance sheet because they relate to receipt transactions only and are eliminated automatically once the items are sold/consumed later on.

The ‘external’ standard cost variances require on the other hand side a separation based on whether they relate to receipt or issue transactions. This separation can be realized by making use of the ledger allocation rules and ensures that an actual cost inventory value can be obtained.

Overall it can be concluded that a parallel inventory valuation can be realized for companies that make use of standard costs by applying general ledger allocation rules. This post concludes this series on the alternative parallel inventory valuation approach. I hope that you found the one or the other useful information. Till next time.

Parallel inventory valuation – an alternative approach (Part 4)

Tags

, , , ,

After the purchase and internal standard cost variances have been analyzed, let’s now have a look at the production related standard cost variances and how to deal with them.

Within this fourth part we will have a look at the lot size variance (LSV) first, which arises for example if the good quantity from a production order differs from the calculation quantity that was used for the standard cost calculation of an item. The following graphic illustrates the composition of the finished item that will be used for the subsequent explanations of the production lot size variance.

203_p4_0005

The graphic above shows a finished good that is made of a raw material that has a standard cost price of $500 setup. In addition, another $500 route related costs – that consist of $490 assembly cost and $10 setup cost – are necessary to produce the item.

 

As the setup costs are independent from the quantity produced, the total production costs of an item decrease, as the production quantity increases. The next graphic illustrates this relationship for the sample item used.

203_p4_0010

 

To illustrate how the lot size variance arises and how to deal with this kind of variance, a production order for 10 pcs of the finished good is processed. The next screen print shows that a total of $9910 production costs arise for the production of the 10 items [$10 setup costs + 10 x ($500 material costs + $490 assembly costs)]. The illustrated lot size variance of $90 results from the fix cost degression effect shown in the previous graphic.

203_p4_0015

Similar to what has been shown in the previous post, the next accounting-like overview summarizes the production postings recorded (separated by the different production steps).

203_p4_0020

warningsign1 The grey highlighted lines offset each other and can thus be ignored for the analysis of the production costs.

For those readers who are not very familiar with ledger postings, the following financial statement overview has been prepared.

203_p4_0025

The financial statement overview shows a total inventory value of $10000 for the finished product on ledger account 140670. To produce those finished goods, raw materials with a total value of $5000 and $4910 labor costs have been consumed. The remaining difference to the standard cost value of the finished goods is assigned to the lot size variance that is recorded on ledger account 540630.

Further above, a realized cost amount of $9910 has been identified. Against the background of this actual cost amount, it can be concluded that the inventory value of the finished goods is overstated by $90 from an actual costing perspective.

If one of the produced items is sold later on, the inventory value is decreased by $1000 – the standard costs of the item. The financial statements illustrated below exemplifies this situation.

203_p4_0035

From an actual costing perspective, the decrease in the inventory value from the sale of the produced item is comparatively too high. The same holds for the cost of sales, which are recorded on ledger account 640650.

In order to arrive at an actual cost valuation, the lot size variance (LSV) needs consequently be adjusted and split up in a similar way that has been shown for the purchase price variance before. The next graphic exemplifies the necessary separation of the total lot size variance if one out of the ten produced items is sold.

203_p4_0036

To conserve space, the setup of the necessary ledger allocation rule is left as an exercise for the reader. If the allocation rule is later on processed, the following financial statements result:

203_p4_0040

The financial statement overview shows a total inventory value that is $81 lower than before. This reduction takes care of the difference between the actual and the standard cost price [9 pcs x ($1000 – $991)]. As the allocated lot size variance amount is recorded on a separate ledger account, a parallel standard cost and actual cost inventory valuation can be achieved.

Please note that this also applies for the COGS amount of $1000 that has been adjusted through a corresponding adjustment on ledger account 640651 to arrive at an actual cost value of $991.

Within the next post we will take a look at the other production related standard cost variances and how to deal with them from a parallel valuation perspective. Till then.

Parallel inventory valuation – an alternative approach (Part 3)

Tags

, , , ,

The next standard cost variance type that has an influence on the parallel valuation approach concerns cost change variances, which can result from two different sources that will be explained in the following.

 

Source 1: Standard cost price differences between sites
Standard costs can be setup in a way that different standard cost prices are defined per site in order to incorporate cost price differences resulting for example from transportation costs, etc. The next screen print exemplifies an item that has different cost prices setup for site 1 and site 2.

203_p2_0010_neu

In order to illustrate what influence these different cost prices have on the parallel inventory valuation approach, 100 pcs of the item have initially been acquired through an inventory adjustment journal for site 1. The resulting financial data can be identified in the following screen print.

203_p3_0010

After the items have been acquired, an inventory transfer from site 1 to site 2 for a single item is posted through an inventory transfer journal.

203_p3_0015

The outcome of this transfer is an adjustment voucher that results in a corresponding increase in the inventory value. The adjustment voucher and the resulting inventory value increase can be identified in the following figures.

203_p3_0020

203_p3_0025

What one can identify from the financial statement reports exemplified above is that the total inventory value increased by $25 because of the item transfer from site 1 to site 2.

Before analyzing how to deal with that variance for the parallel inventory valuation approach, let’s have a look at the second possible source of cost change variances.

 

Source 2: Customer item return after standard cost price change

A second possible source for cost change variances are situations where standard cost items are sold to customers and returned after a cost price adjustment has been completed.

The following example illustrates this scenario where initially 100 pcs of a standard cost item with a cost price of $100/pcs are acquired – for reasons of simplicity – through an inventory adjustment journal. The next screen print shows the resulting financial statements.

203_p3_0030

After the items have been acquired, 5 pcs are sold for a sales price of $200/pcs. With a standard cost price of $100/pcs, the company’s inventory value is consequently reduced by $500, which can be identified from the next financial statement illustration.

203_p3_0035

Shortly after the items have been sold, the standard cost price of the remaining inventory items is adjusted from $100 to $130. The resulting accounting voucher and financial statements are shown in the next screen prints.

203_p3_0040

203_p3_0045

The screen prints above illustrate that the change in the standard cost price resulted in a $2850 higher inventory value [95 pieces x ($130-$100)].

 

After the standard cost price has been increased from $100 to $130, the customer decided to return 3 out of the 5 pcs sold. Posting the return order packing slip and invoice results in a number of transaction vouchers that are summarized in the next accounting-like overview.

203_p3_0050

warningsign1 The grey highlighted lines offset each other and can thus be ignored for the analysis of the production costs.

 

The transaction vouchers summarized above demonstrate that the item return resulted in a corresponding adjustment of the sales revenue and the receivables amount (3 pcs x $200 sales price / pcs = $600). At the same time, an adjustment of the COGS and inventory value was recorded. Yet, because of the cost price change, a $90 higher inventory value remains.

Expressed differently, selling and returning the 3 items resulted in a $90 higher inventory value, which can be identified in the following financial statement overview.

203_p3_0055

 

After having analyzed the sources of cost change variances, the question arises, how to deal with them in order to arrive at a parallel actual cost based inventory value? 

As mentioned in the previous post, standard cost price changes resp. differences typically do not reflect actual (market) price differences but rather cost/transportation/handling cost differences.

Moreover, in an actual inventory costing environment, internal movements of goods between different sites do not affect the company’s profit. That is, a company does not get richer or poorer by the mere fact that an item has been shifted from one location to the other, as it might be the case for standard cost items.

The same holds for the second source of the identified cost price changes; i.e. in an actual costing environment, a company does not get richer or poorer by shipping and returning goods to and from a customer, as it might be the case in a standard cost environment.

For those reasons and because cost change variances affect receipt transactions only, it can be argued that the complete cost change variance amount needs to be shifted from the company’s income statement to it’s balance sheet in order to arrive at an approximate actual cost valuation. This shifting can once again be realized by making use on an allocation rule similar to the one that has been introduced in the prior posts.

The next posts will deal with the production related standard cost variances and how to incorporate them in the parallel inventory valuation approach. Till then.

Parallel inventory valuation – an alternative approach (Part 2)

Tags

, , , ,

After having analyzed how to deal with purchase price variances in order to arrive at a second (parallel) inventory value, let’s have a look at the second standard cost variance type – the inventory cost revaluation – and how to deal with those variances to obtain a second (parallel) inventory value for standard cost items.

 

Scenario:
At the end of a fiscal year, the standard costs of a first item are adjusted from $100 to $109. For a second standard cost item, the standard costs are adjusted from $100 to $95. As there are currently 100 pcs from each of the items on stock, a total inventory value of $20000 can be identified (before adjusting the standard cost prices) in the financial statements illustrated in the next figure.

203_p2_0005_neu

warningsign1 For reasons of simplicity the inventory values/balances have been created by posting an inventory adjustment journal that resulted in an inventory receipt & profit transaction.

 

The aforementioned revaluation of the standard cost item is realized by recording and activating the new standard cost prices in the standard cost costing version, as exemplified in the next screen print.

203_p2_0010_neu

Once the new standard cost prices are activated, the financial statements show a $400 higher inventory value. This can be identified from the next figure.

203_p2_0015

The overall increase in the inventory value can be explained by the value increase of the first standard cost item [($109-$100) x 100 pcs] and the value decrease of the second standard cost item [($95-$100) x 100 pcs]. If the revalued items will be sold subsequently, the newly activated standard cost prices will be used for posting the issue transactions.

 

At this point the question arises whether the inventory cost revaluation amount can remain in the income statement as illustrated in the previous screen print or whether an adjustment similar to the one that has been shown in the first part for the purchase price variance (PPV) is required in order to get a second (parallel) inventory value?

This question can be answered by stating that no split and allocation of the cost revaluation is required, if the cost revaluation is done in a way to adjust the standard cost prices to an ‘actual’ market price. If this is the case, any previously recorded adjustment and allocation of the PPV needs to be reversed in order to avoid an over-adjustment of inventory values towards actual market prices/values.

In practice, most companies do not adjust their standard cost prices in a way to reflect ‘actual’ (market) cost prices. Otherwise, they would have chosen an alternative actual cost price valuation model right from the beginning. Against the background of this common adjustment behavior, it can be argued that an adjustment of the recorded standard cost revaluation amount is necessary in order to arrive at an approximated actual inventory cost price. The main question in this context is then how such an adjustment can be realized?

From the authors’ perspective, the complete cost revaluation amount needs to be shifted (allocated) from the income statement to the balance sheet in order to arrive at an actual cost valuation amount. That is because only those items that are currently on stock (or in process) – that is receipt transactions – are affected by the cost change variance. If those items are sold or consumed later on the adjusted higher/lower standard cost price will ensure that the cost revaluation amount that has been allocated to the balance sheet is successively eliminated. For that reason no split up and allocation of the cost revaluation amount is necessary.

The next part of this series continues with analyzing cost change variances and how they need to be incorporated into this parallel inventory valuation approach.

Parallel inventory valuation – an alternative approach (Part 1)

Tags

, , , ,

In one of my prior posts I already had a look at the parallel inventory valuation issue. For details, please see this site.

While the prior post focused on the Russian dual warehouse functionality, this post focuses on an alternative parallel valuation approach I recently came across. A major advantage of this alternative approach compared to the Russian dual warehouse functionality is that it does not depend on country-specific features but rather makes use of generally available functionalities that can be applied in every Dynamics AX/365 for Operations environment.

Let’s get started by having a look at the underlying business scenario for this parallel inventory valuation approach.

 

Scenario:
The following illustrations and explanations are based on a company that makes use of standard costs but requires an ‘actual cost’ evaluation for external reporting & tax purposes.

In order to explain the underlying parallel inventory valuation approach, the following sample transactions have been recorded for a trading item; that is, an item which is not used in the production process.

203_0015 (DOM = Day Of the Month)

The sample transactions illustrated in the previous figure start with the purchase of 50 pcs of the trading item for a price of $110. As the item is set up with a standard cost price of $100, a purchase price variance (PPV) of $500 results.

The second sample transaction also relates to a purchase order where another 150 pcs of the item are purchased for a price of $95. The major difference between the first and this second transaction is that the second one is only packing slip updated whereas the first one is packing slip and invoice updated.

The third and fourth sample transactions represent (internal) inventory adjustment postings for which no purchase price variance arises.

Those internal transactions are followed by a third purchase order related transaction where another 250 pcs of the item are purchased for a cost price of $105.

Finally, 50 pcs of the trading item are sold to a customer. As the item is set up with standard costs of $100, the inventory value is reduced by a total of $5000.

After all sample transactions are recorded, an inventory value of $45000 remains in the balance sheet (BS) and a PPV of $1000 in the income statement (IS). The next figure illustrates the respective financial statement reports.

203_0020

My next step was making a manual inventory value calculation for the sample transactions in order to get an impression of the theoretically correct actual cost inventory value. To achieve this, an average cost price has been calculated before recording the different (internal and external) issue transactions. This calculation is similar to what one can identify in Dynamics AX for a weighted average cost price valuation and is exemplified in the following figure.

203_0025

warningsign1 Depending on how the average values are calculated – before each issue transaction or for the whole period – different actual cost inventory values result. As an example, if a single average cost price is calculated and used for the valuation of the issue transactions, a total inventory value of $45849.06 results. Those valuation differences do, however, not matter here because they have only been shown for explanatory purposes.

 

What matters though is the fact that the issue transactions, which have been recorded with the standard cost prices, require some adjustments in order to arrive at an actual cost value. The way how those adjustments can be calculated is illustrated in the following figure.

203_0030

What can be identified from the previous figure is that the total PPV is split up based on the relationship between the total receipt and total issue transactions. As an example, the $868.85, which are assigned to the total receipt transactions are calculated as follows: $1000 / ($53000 + $8000) * $53000.

 

warningsign1 If only external receipt and issue transactions are taken into account; that is, if the inventory adjustment transactions, which did not generate a PPV are excluded from the calculation, the following PPV amounts are calculated and can be assigned to the receipt and issue transactions recorded.

203_0035

 

Building upon the last separation of the total PPV, an actual cost inventory value can be approximated by shifting the fraction of the PPV that can be assigned to the receipt transactions from the income statement to the balance sheet. The next illustration exemplifies this.

203_0040

 

After having analyzed the theoretical concept how an actual cost inventory value can be approximated for a company that uses standard costs, the question arises how this theoretical concept can be implemented into Dynamics AX/365 for Operations?

The answer to this question are General Ledger (GL) allocation rules that can be used for transferring the part of the PPV, which relates to the receipt transactions, into the company’s balance sheet.

The next screen print shows the allocation rule used. Please note that this rule is set up with the ‘basis’ allocation method.

203_0045

The ledger account that records the PPV for the trading items – account no. 540400 in the example – is included in the ledger allocation source form and will be used as the basis for the subsequent allocation calculation.

203_0050

warningsign1 Please note that the allocation basis is defined in combination with the financial dimension ‘item group’, which has been assigned to all trading items. Referring to the item group rather than using separate allocation rules for each individual trading item is a simplification that will not result in an individual but a group-based inventory valuation of the item. From the author’s perspective, this simplification appears to be justifiable, as companies regularly do not report inventory values on an individual item basis in their external financial statements.

 

The next setup required for using ledger allocation rules concerns the offset account, which should be different from the PPV account that is used in the ledger allocation source form shown above in order to allow users tracking the original and adjusted PPV.

203_0055

Finally, ledger allocation rule destinations have to be set up that define the account-financial dimension combinations to which the PPV will be allocated.

The next screen prints show that the part of the PPV that relates to the issue transactions is recorded on the income statement account 540401. The part of the PPV that relates to the receipt transactions is, on the other hand side, recorded on the balance sheet account 140499.

203_0060 203_0065

Once the ledger allocation rule is setup and activated, it can be processed. Processing the exemplified allocation rule results in the following voucher, which debits the PPV income statement account 540401 for the part of the PPV that remains in the income statement. The remainder of the PPV is consequently shifted to the balance sheet account 140499. In order to avoid a double counting of the PPV, the credit transactions on the income statement account 540409 offsets the posted PPV.

203_0070

The following screen print summarizes the resulting balance sheet and income statement reports after the allocation rule is processed and posted.

203_0075

 

Assessment:
The parallel inventory valuation approach illustrated in this post requires that all items are set up with an ‘item group’ or ‘item’ financial dimension. In addition, separate issue and receipt accounts need to be set up for the different inventory transaction types.

Apart from those setup considerations, major disadvantages of the approach demonstrated here comprise:

  1. That the ‘actual’ inventory cost value can be identified at the General Ledger level only, and
  2. That the approach illustrated requires the use of standard costs.

Despite those disadvantages, the inventory valuation approach demonstrated here seems to be much better suited than alternative approaches the author came across, such as creating specialized and complex inventory transactions reports that are used for recording manual adjustment postings at the General Ledger level or doing some ‘creative’ Excel calculations in order to arrive at an actual cost value amount which is subsequently posted in the system. What is more, the approach illustrated here is in line with the ‘specific identification’ valuation methods that are allowed to be used by IFRS and US-GAAP.

The next post will extend the approach exemplified here to the other standard cost price variances. Till then.

Return order cost prices & devaluations

Tags

, ,

Recently, I was asked by a colleague how to devalue items that have been returned from a customer. As I believe that the one or other reader came across similar issues, I summarized some of the pitfalls one should be aware of when recording item returns from a customer.

 

Scenario:
Some time ago 1000 pcs of an item have been purchased for a cost price of $100/pcs. Later on, 100 pcs were sold to a customer for a sales price of $200/pcs. After the customer noticed that he ordered too many of the items, he returned 20 pcs, which shall be devalued as they have been polluted.

The return of the items from the customer was recorded through the standard return order form. As the originally sales order through which the items have been sold was not known, the ‘find sales order’ button was used. The next screen print illustrates this.

204_0005

Once the sales order was identified, the return quantity was entered in the return quantity field and confirmed with OK.

204_0010

Confirming the return quantity this way resulted in the automatic creation of a return order line that was linked to the original sales order. For that reason, the return cost price – which can be identified in the return order line details section below – could not be edited.

204_0015

Once the returned items were registered and packing slip updated, I tried to outsmart the system by changing the return cost price in the sales order form right before posting the credit note for the customer.

204_0020

Unfortunately, this trick did not help and had no effect on the cost price that was posted with the item return. The next screen print demonstrates this by showing a posted return cost price of $2000 for the 20 pcs recorded.

204_0025

warningsignklein Please note the highlighted lot id fields, which illustrate that the original sales order (no. 000800) is linked to the return order (no. 000801).

 

Because the return order was posted with the original cost price, I tried recording a cost adjustment through the inventory closing and adjustment form illustrated in the next screen print.

204_0030

Unfortunately, also this did not help because the only transaction available for adjustment was the original purchase order through which the items were originally purchased.

204_0035

warningsignklein After posting an inventory close, the on-hand adjustment form/option became available. Yet, as I was interested in adjusting only a subset of the total on-hand amount, I gave up on this way of making the value adjustment.

 

Rather than trying to correct the return order transactions with hindsight, I created a second ‘test’ return order for 10 pcs in order to differentiate it from the first one. This time the return order was recorded without making use of the search functionality but by entering the return order line directly. As the return order line was not linked to the original sales order, I could adjust the return cost price that was finally used when posting the return order credit note. The next screen prints illustrate this.

204_0045

204_0050

warningsignklein As the return order was not marked against the original sales order, I was even able to make an adjustment to the return cost price through the inventory closing and adjustment form. For details, please see the next screen print.

204_0055

warningsignklein An alternative to manually entering the return order lines without referencing (marking) the original sales order is making use of charge codes that can be linked either to the return order directly or to the disposition codes as exemplified in the next figure.

204_0060

The major disadvantage of those charge codes is that they cannot be setup for item transactions and can thus only be used for creating general ledger accrual transactions that do not have a direct influence on the inventory value in the inventory module.

 

Summary:
This post summarized some of the pitfalls one should be aware of when it comes to the devaluation of item returns from customer. The main issue one needs to be aware of is that the search functionality in the return order form marks the original sales order and the return order, which does not allow users modifying the return order cost price.