Inventory Costing and Valuation has always been a hot topic of discussion with anyone who was responsible for managing ERP data and reporting. Due to the increasingly complex supply chain and manufacturing environment, this is definitely a topic today's Microsoft Dynamics 365 Business Central users must understand.
Business Central (BC) offers a rich set of functionality to provide organizations with the ability to accurately track the value of their inventory and the ultimate Cost of Goods Sold that is reported when the inventory is sold.
Business Central supports several Costing Methods including FIFO, LIFO, Average, Standard, and Specific. Additionally, inventory Items may be set up to be lot/serial tracked, and may also have additional costs (or Item Charges) added to the value of the item for things like inbound freight, duties and taxes, or even storage.
All this complexity leads to the following types of questions posed by BC users:
Why is there a difference between the “Original Cost” and the “Adjusted Cost” on the Sales Invoice Statistics page?
Why am I receiving a message when doing [X] that tells me that my inventory costs needed to be adjusted?
Why do I see a difference in the costs/margins on sales reports and the “Cost of Goods Sold” reported on my financial statements?
How does BC apply the cost to a sale when inventory is shipped to a customer?
All these questions relate back to a standard process within BC called “Adjust Cost – Item Entries”.
This post was originally published several years ago for Microsoft Dynamics NAV (and is still available online). This updated version has been “refreshed” to be compatible with the latest version of Microsoft Dynamics 365 Business Central.
What is “Adjust Cost – Item Entries”?
In summary, this is a standard process within Business Central that analyzes the Item Ledger Entries to ensure that all cost layers are accurate. More specifically, it ensures that existing inventory cost layers have been properly applied to sales (and other negative entries), thereby ensuring that the Inventory Valuation and Cost of Goods Sold amounts posted within BC are accurate.
Or stated another way: under most circumstances, if the “Adjust Cost – Item Entries” process has not been run recently in your BC Company, the Inventory Valuation and Cost of Goods Sold will NOT be accurate.
Does this process run automatically or does it need to be run manually? And how often does it need to be run?
Whether or not this is a process that needs to be run manually depends on how BC has been set up.
Within the Inventory Setup Page, there are options available that will determine how and when the “Adjust Cost – Item Entries” process is run.
While the “Automatic Cost Posting” field is also related to inventory cost posting, the key field in determining how and when the “Adjust Cost – Item Entries” process is run is the “Automatic Cost Adjustment” value. This value can be changed at any time.
Never: Costs are never adjusted automatically when Item entries are posted. A user must manually run this process, or the process must be set up to run automatically on the BC Job Queue on a pre-defined frequency (nightly).
Day/Week/Month/Quarter/Year: Costs are adjusted if posting occurs within one Day/Week/Month/Quarter/Year from the work date when an Item entry is posted.
Always: Costs are always adjusted when posting, irrespective of the posting date. This will impact the processing time of each transaction “post”, however based on volume of transactions being processed, this additional time may be imperceptible to the user.
In terms of how often this process needs to be run, it truly only needs to be run prior to running any reports that analyze inventory value or sales profitability. Specifically, it should be run before running the Inventory Valuation Report, or Customer/Item Statistics Report, or Financial Reports that analyze sales, cost of goods sold, and gross profit.
Aren’t my costs always up to date? What is an example where the “Adjust Cost” process is needed?
It should be assumed that this process is always required to accurately determine inventory values and costs. While there are many scenarios that require this process for accurate costing and inventory valuation, the very common and simple example below demonstrates why the “Adjust Cost – Item Entries” process is critical to ensure the accuracy of inventory values and costing.
NOTE: In this example, the "Automatic Cost Adjustment" field on the Inventory Setup page has been set to Never. This is so that we can analyze the results of each step as we progress through this example.
A new Item is set up with Costing Method = FIFO. During the setup of the new Item, the user manually types in $20.00 as the “Unit Cost” on the Item Card as this is the expected cost of this Item. The “Last Direct Cost” field is blank because the Item has not yet been purchased (invoiced).
On January 1, we receive and invoice 100 EA of Item No. 1108 at $20.00, resulting the Item Ledger Entry below. The “Unit Cost” on the Item Card is not adjusted and remains at $20.00.
On January 15, we receive and invoice an additional 100 EA for Item No. 1108 at $30.00. After this entry is posted, the following Item Ledger Entries exist. The “Unit Cost” on the Item Card is not adjusted and remains at $20.00.
On January 16, the “Adjust Cost – Item Entries” process is run.
Note on the screenshot below how this process can be run for a specific Item by populating the “Item No. Filter” field or for all Items by leaving this field blank.
To automatically generate the related G/L Entries for any cost adjustments created, check the “Post to G/L” box. If you do not check this box, then you must manually run the “Post Cost to G/L” process to post the cost adjustments that are created by the “Adjust Cost – Item Entries” process to the General Ledger.
The “Unit Cost” field on the Item Card has now been updated to $25.00. This value is a weighted average cost that will be used as the estimated unit cost on sales document lines as they are created. We will review this in detail in the next few steps.
Note: There is no change made to any of the Item Ledger Entries that already exist in this example (since no sales have taken place yet).
On January 31, a Sales Order for a quantity of 1 EA of Item No. 1108 is entered into BC.
Note on the screenshot below that the “Unit Cost” value from the Item Card is populated into the “Unit Cost” field on the Sales Order Line. While this field is typically not displayed on the Sales Order page, this field is populated and is used to store the expected cost because at this point, BC cannot be sure which specific cost layer will ultimately be shipped and invoiced against this order. The “Unit Cost” from the Item Card is the most accurate estimate of the eventual cost at this point.
Also, on the following “Sales Order Statistics” Page, both the “Original Cost” and “Adjusted Cost” values are based on the “Unit Cost” values on the Sales Order Lines.
On February 1, this sales order for Item No. 1108 is “Shipped”, and then is “Invoiced”. The result is the Posted Sales Invoice below. Note that the “Unit Cost” field on the Invoice Line was copied directly from the Sales Order line.
Additionally, note that the “Original Cost” and “Adjusted Cost” on the Sales Invoice Statistics Page also both remain at $25.00.
The Item Ledger Entries for this Item now appear as follows:
Finally, note that when the “Invoice” post was completed, in addition to the reversal of the “Interim” entries created when the Sales Order was “Shipped”, a G/L Entry was created to debit “Cost of Goods Sold” and credit “Inventory” for $25.00.
On February 2, the “Adjust Cost – Item Entries” process is run for all Items. This process will adjust the Item Ledger Entries and G/L Entries so that the cost layers are applied accurately. Let’s review all of the entries again to review how they have been adjusted.
The Item Ledger Entries for Item No. 1108 now appear as follows. Note that the “Cost Amount (Actual)” now accurately reflects the fact that the first cost layer was reduced at a cost of $20.00 (not the original $25.00).
The “Cost Amount (Actual)” value is a flow field that sums up the associated Value Entries. By drilling-down on this field, the original value entry as well as the “Adjustment” entry are visible:
The following G/L Entries were posted during the “Adjust Cost – Item Entries” process to reflect the adjustment of cost against this order:
Furthermore, the Sales Invoice Statistics have also been adjusted to reflect the adjusted cost:
However, note that the “Unit Cost” value on the Sales Invoice line has not been adjusted and continues to reflect the original cost assigned when the sales order line was created - even after the “Adjust Cost – Item Entries” process has been run. For this reason, it is critical that all sales analysis reports and inquiries link back to the Item Ledger and Value Entries to capture the adjusted costs.
Summary
The standard BC “Adjust Cost – Item Entries” process is critical in ensuring that inventory values and costs are accurate throughout BC and is required for any BC environment with inventory items.
Beyond this simple example demonstrated above, this powerful process enables a variety of scenarios to be used within BC that would otherwise not be possible while continuing to keep inventory values and costs accurate. Examples of these more complex scenarios include the assignment of Item Charges, back-dating of inventory entries, transaction reversals, credit memos, inventory revaluations, and other types of inventory adjustments.
Run it “always” in real-time as transactions are processed, or run it each night using the Job Queue, or run it once per month during the month-end closing process – but always be sure to run it!
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