About item costs and valuation methods

Depending on the valuation method you have selected for the stock item, the cost of its base unit is either:

• computed by the system based on purchase receipts or
• estimated outside the system and entered manually by the user.

For information about how costs are maintained for non-stock items, seeAbout non-stock item support. The system uses the item's valuation method to revalue its stock and to determine its unit cost for sales orders and inventory transactions.

The following valuation methods are available to choose from:

• FIFO (first in, first out)
• Specific
• Average
• Standard cost

These methods are discussed in detail in the sections below.

Assigning valuation method

You assign valuation methods to stock items in the following ways:

• By using theItem classes (IN201000) window, you can assign a valuation method to a class, which will be used for the items of the class.
• By using theStock items (IN202500) window, you can assign a valuation method to a particular item, if you want to override the valuation method of its item class.

Reassigning the valuation method

As long as the item is out of stock, you can reassign an item's valuation method in the following way:

• from FIFO to Average,

• from Average to FIFO, and

• from Standard cost to Average and FIFO.

If the FIFO valuation method is assigned to a stock item, its unit costs are recorded in layers, each of which is identified by

• the receipt date,

• the quantity, and

• the purchase price (unit cost).

Cost layers

Each new receipt creates a new cost layer with specific unit cost. You can view the cost of the last layer in the Last cost read-only field on the Price/cost information tab of theStock items (IN202500) window.

When a certain quantity of the stock item is issued, the cost for the item is assigned starting with the earliest available cost layer.

If the quantity to be issued is greater than the quantity in the earliest layer, the entire quantity from the earliest layer will be issued (with the associated unit cost) and the rest of the required quantity will be issued using the next earliest layer (with another unit cost).

Example with the FIFO issue method

Let's say a stock item was purchased in the following way:

• Cost layer 1: May 10, 5 units at €8 each
• Cost layer 2: June 10, 5 units at €10 each

The total stock cost is (5 * €8) + (5 * €10) = €90.

Further imagine that for a sales order, 8 items are required.

All units from cost layer 1, and three units from cost layer 2 will be used to complete the transaction, with the extended cost equal to (5 * €8) + (2 * €10) = €60.
For the next sales order, there will be no more items with the €8 unit cost.

Cost separately option

For each location in a warehouse that has the Cost separately check box selected, separate cost layers will be created, based on purchase receipts made to the particular location.
If certain quantities of the items should be issued from the location, the extended cost will be computed based on those location-specific cost layers.

The Specific valuation method is used for items with lot or seral number tracking.

With this method, the unit cost for each item is defined by the unit's purchase price.
The unit cost assigned to the item on its receipt will remain the same until the item is issued, used as a component, or sold.

Cost layers

With the Specific method, cost layers are based on the serial or lot numbers.

New receipts specifying the same serial or lot number will update the cost of the layer.

Example with the specific issue method

Imagine that a stock item was purchased as follows:

• May 19, 100 items starting with the serial number 11023423 at €2.00 each
• May 21, 100 items starting with the serial number 11023523 at €2.10 each
• May 19, 100 items starting with the serial number 11023623 at €1.90 each
• May 19, 100 items starting with the serial number 11023723 at €2.20 each

The total stock cost is €820. When items with the serial numbers 11023666 and 11023444 are sold, the unit costs recorded to the COGS account are €1.90 and €2.00 respectively.

If the Average valuation method (also known as average moving cost) is assigned to the stock item, the unit cost will be calculated as the average weighted cost of all items at the warehouses or the total costs of all quantities of the stock items at the warehouses divided by the total quantity.

This valuation method is used for items that do not require tracking by lot or serial numbers or by expiration dates.

Cost layers

The average cost will be automatically updated every time a new receipt specifying a unit cost different from the current average cost is released.

Once this receipt has been released, a batch of journal entries will be generated to adjust the costs of all available items.
You can view the current average cost in the Average cost read-only field on the Price/cost information tab of the Stock items (IN202500) window.

Example with the average valuation method

Imagine that a stock item was purchased as follows:

• Layer 1: 100 items at €2.00 each
• Layer 2: 100 items at €2.10 each
• Layer 3: 100 items at €1.90 each
• Layer 4: 100 items at €2.20 each

The total stock cost is €820, and the average cost is €2.05.

If you sell 250 items, the unit cost is €2.05, and the extended cost recorded to the COGS account is €512.5 = €2.05 * 250.

Standard costs, which are estimated to include some of the indirect and direct costs allocated, for stock items are determined outside of Visma Net by cost experts.

For a stock item with the Standard cost valuation method assigned, the unit cost is entered directly by the user in the Pending cost field on the Price/cost information tab of the Stock items (IN202500) window.

Warehouse specific standard costs

For items with the standard cost valuation method, standard costs can be maintained for each warehouse separately if the Override standard check box, located on the Price/cost information tab of the Item warehouse details (IN204500) window, is selected for the item stocked at a particular warehouse.

The item cost doesn't change as new receipts are released.

Example with the standard cost valuation method

A stock item with a standard cost defined at €2.50 was purchased in the following way:

• Layer 1: 100 items at €2.00 each
• Layer 2: 100 items at €1.90 each
• Layer 3: 100 items at €2.30 each
• Layer 4: 100 items at €2.60 each

The total stock cost is €1000. Any differences between the standard cost and the unit cost on receipts multiplied by the quantity on the receipt are recorded to the standard cost variance account: in this case, €50, €60, €30, and –€10 respectively. On sales orders, the unit cost will appear as €2.50.

Updating standard costs

Generally, standard costs are revised at the end of the financial year based on the financial results of the year, although they can be updated as often as is needed.

If you want to update standard costs for a number of stock items, use the Price/cost information tab of theStock items (IN202500) or the Non-stock items (IN202000) window.

New values for standard costs are entered as pending standard costs. The pending cost assigned to a stock item that uses the standard cost valuation method becomes effective starting on the Pending date specified on this tab.

Update costs for multiple items

If you want to make similar changes to many or all stock items, use theUpdate standard costs (IN502000) window to enter new values and compare current and pending costs side by side for all stock items. If you are satisfied with the changes, you can update the current standard costs with the pending standard costs for all items or only selected ones by using the Process all or Process action on the window toolbar.

Historical data

The system doesn't keep a history of the standard costs for the stock items, displaying only the last cost and current cost values on the Price/cost information tab of theStock items (IN202500) window. The historical costs that were effective before the last cost are not stored in the database.

For items with the Standard cost or Average valuation methods, on inventory issues, unit costs (costs with respect to the base unit) are specified in the Unit cost field in the Issues (IN302000) window.

If an item has the FIFO or Specific valuation method assigned, costs of its units may be different, and the Unit cost field on the window displays the unit cost for the first unit to be issued, in accordance with the stock item's issue method. You can invoke the Allocations dialog box to view particular items to be issued or to select them by lot or serial numbers. The Manual amount value in the Issues (IN302000) window will automatically appear as the sum of the unit costs of all listed items.