This article runs through the inventory cost methods and explains what each one means.
Acctivate is a perpetual inventory system using a continuous calculation for the inventory valuation and cost of goods sold. The cost for each transaction is calculated using all transactions prior to and including the specific transaction date. Therefore, multiple transactions in a given accounting period may be calculated at different unit costs.
Multiple accounting methods are supported. The Cost Method is defined for each Inventoried product. For example, you may use Actual Cost (Specific Identity) for lot and serial-numbered and Average Cost for standard items.
Note: Changes to a different costing basis may have a material effect on your financial statements and your tax return. Changes may require prior approval by your tax authority. For example, the IRS requires notification for US businesses. It is strongly recommended that you consult your CPA or tax advisor when selecting or adjusting your cost accounting method(s).
The average cost of all stock-on-hand per warehouse. As new stock is received, the total value of the received items is added to the value of the existing inventory. The resulting value is divided by the resulting quantity on hand to form a true cost. Please refer to our Average Cost Method article for more details.
Typically, standard is used to value finished-goods inventory resulting from a manufacturing process. All stock-on-hand is valued at the standard cost established for the product. This means any inventory transaction posted at a cost other than the Standard will prompt a Balance Adjustment to be created and posted in Acctivate. Standard cost may be changed at any time by entering a balance adjustment transaction which utilize the Gain/Loss GL Account set per warehouse. This change is effective from time-of-entry and cannot be back-dated.
On the other hand, Standard Cost can be used for products which are non-inventoried by nature (labor, shipping, other charges, etc.). When utilizing this feature, be sure to set the Standard Cost as well as the Standard Cost Offset GL Account per warehouse. For further information on setting the offset accounts, check out this article.
LIFO (Last In First Out)
When stock is received a cost-layer is established which identifies the quantity, unit cost and total value of goods received in this transaction. As stock is sold, the layers are costed and depleted beginning with the most recent layer. It is not advised to use LIFO with serial or lot control.
FIFO (First In First Out)
When stock is received a cost-layer is established which identifies the quantity, unit cost and total value of goods received in this transaction. As stock is sold, the layers are costed and depleted beginning with the oldest remaining layer. It is not advised to use FIFO with serial or lot control.
Actual (Specific Identity)
When stock is serial-numbered, the option exists to cost each item sold at the actual cost for which it was purchased. When stock is lot-numbered, the actual cost is the weighted average of all purchases for that lot. Note: Actual Cost is only available for lot and serial-numbered products.