Within this addendum I would like to show you how inventory and ledger balances can be reconciled by using the first “financial dimension” reconciliation approach presented in the earlier post.
I will do this based on the following simplified production item (finished product) “L6300” that consists of another item (“L6301”) and a subcontracting service item (“L6302”). The quantities and cost prices that make up the Bill of Materials (BOM) of the finished product can be identified in the next screenshot.
Production step 1: Inventory adjustment Item L6301
In order to produce the production item, I first need to ensure that sufficient parts of the BOM item “L6301” are on stock. I realize this by posting an inventory adjustment journal that generated the following ledger transaction (please see the next screen-print).
What you can identify from this voucher is an increase in inventory value of 40 EUR that is posted against a profit & loss account (“510504”). Please note that all transactions are recorded with the financial item transaction of the BOM item (“L6301”).
Production step 2: Production start
After ensuring that sufficient parts are on hand for production, I started the production order. While doing that, Dynamics AX generated the following voucher:
What you can see from this voucher is an increase in the WIP balance sheet account 150151 and 150153 that are highlighted in green color. The offset transactions are all posted on the inventory accounts 140103 and 140303.
Please note that the voucher for the subcontracting service item that is recorded against the inventory account 140303 could also be recorded against a profit and loss account. In addition, with a slightly different item setup, the voucher for the service item could also have been posted later; that is in later production steps.
Irrespective of the timing of the subcontracting service item posting and the ledger account used, after posting the voucher for the subcontracting item, the inventory value report shows a variance of 10 EUR, which is equal to the value of the subcontracting item “L6302”.
The underlying reason for this variance is that the inventory value report does not incorporate service items.
Now, let’s have a look at the result that can be identified in the trial balance after finishing the first production step.
The following screenshot shows you, the outcome of the first production step (inventory adjustment) highlighted in yellow color and the outcome of the second production step (production start) highlighted in green color. What you can identify from this screenshot is that both financial item dimensions (“L6300” and “L6301”) are balanced and add up to a total value of 0 EUR.
The next screenshot shows the very same balances sorted by main accounts. What I would like to emphasize from this screenshot are the transactions recorded on the green highlighted WIP accounts that incorporate the total value of the finished product.
Production step 3: Report as finished
The next production step is reporting the production order as finished, which results in the following voucher:
As before, the inventory value report still shows a variance of 10 EUR.
The trial balance list page on the other hand does still show a balanced result for the financial dimensions “L6300” and “L6301”.
The WIP accounts are now cleared and show a total amount of 0 EUR (highlighted in green color). At the same time, the preliminary inventory account for the finished item (main account 140204) shows a balance of 50 EUR.
Production step 4: End production
The last production step ends the production order. When ending the production order, Dynamics AX reverses all previous vouchers and posts the increase in inventory for the production item. The next screenshot shows you the voucher generated for my demo item.
As before, even after finishing the production order, the inventory value report still shows a variance of 10 EUR.
The trial balance list page on the other hand shows balanced item financial dimensions.
The same holds for the ledger accounts.
Production step 5: Post vendor invoice for the subcontracting item with a price variance of 2 EUR
Some days after ending the production order, the subcontracting vendor sends his invoice for 12 EUR. The 2 EUR price variance is accepted. After posting the vendor invoice, the following voucher results.
If we have a look at the inventory value report we do now see a variance of 2 EUR that is equivalent to the price difference for the subcontracting item.
An analysis of the trial balance list page shows – as before – a balanced outcome for the financial item dimensions …
… as well as for the main accounts.
Production step 6: Inventory reconciliation
The last “production” step used in this demo is running an inventory reconciliation, which generated the following voucher:
If we have a look at the inventory value report we can now identify that inventory and ledger amounts are finally balanced.
Within this blog post I highlighted you the specific problems that many production companies face with the inventory value report when they outsource a part of their production chain. Those companies might always see a variance in the inventory value report. Yet, by applying an alternative reconciliation approach – such as using an item financial Dimension – reconciling inventory and ledger balances becomes possible.