How invoice variances affect the average costs of items

When calculating the average cost of an inventory item, the cost and currency variances are used to update inventory costs. This action occurs when the Update Cost/Currency Variances on Inventory Costs check box is selected. If the check box is cleared, the variance costs are not used to update inventory costs but are written to variance accounts instead.

The Update Cost/Currency Variances on Inventory Costs option is available from the Inventory Defaults window of the Organizations application.

For any transaction involving movement of items, the change of value in inventory must equal the transaction cost. In any case where this condition is not true, additional transactions must record the difference.

The product uses a perpetual average (or moving average) method for maintaining inventory value.

The primary features of the perpetual average method are the following:

  • Inventory is valued at the average cost of the items in stock.
  • The average cost is updated each time an item is received into the storeroom.
  • Each transaction is considered individually for its effect on the average cost.
  • Items are sold or issued at the average cost at the time of the sale or issue.
  • Each transaction must balance credit and debit accounts.

Variances must be recorded if transactions affecting an inventory control account do not have an equal effect on inventory value.

Calculation of average cost for invoice variance

When invoice quantity is less than or equal to inventory balance, the average cost is calculated as follows:
  • Average cost = cost / quantity

When invoice quantity is greater than inventory balance, the average cost is calculated as follows:

  • Average cost = (current average cost * inventory current balance) + cost/inventory current balance + quantity

In either case, the remaining invoice variance is recorded in the invoice transactions (INVOICETRANS) table.

Example with invoice variance

  • Storeroom before invoice approval (after receipts):
    • Balance = 8
    • Average Cost = 10.00
    • Value = 80.00
  • Receipt Line (to be matched to the invoice):
    • Quantity = 4
    • Cost = 11.00
  • Invoice line (actual invoice):
    • Quantity = 4
    • Cost = 11.10
  • Receipt update:
    • Quantity = 0
    • Cost = 0.40
  • Storeroom after invoice approval:
    • Balance = 8
    • Average Cost = 10.05
    • Value = 80.40

Example without invoice variance (balance is less than or equal to invoice quantity):

  • Storeroom before invoice approval (after receipts and issues):
    • Balance = 1
    • Average Cost = 10.00
    • Value = 10.00
  • Receipt Line (to be matched to the invoice):
    • Quantity = 4
    • Cost = 11.00
  • Invoice line (actual invoice):
    • Quantity = 4
    • Cost = 11.10 [ total variance is 0.40: 4 * (11.10 - 11.00) ]
  • Receipt update:
    • Quantity = 0
    • Cost = 0.10 [ applied to inventory: 1 * (11.10 - 11.00) ]
  • Invoice variance:
    • Quantity = 0
    • Cost = 0.30 [ applied as invoice variance: (4 - 1) * (11.10 - 11.00) ]
  • Storeroom after invoice approval:
    • Balance = 1
    • Average Cost = 10.10
    • Value = 10.10