Items and Inventory:

Valuation Methods
SAP Business One
Version 10.0

PUBLIC
Objectives

At the end of this topic, you will be able to:

 List the valuation methods used in perpetual inventory in SAP Business One

 Describe how each valuation method works

 Discuss the differences between perpetual and non-perpetual inventory

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Business Scenario

 The company uses perpetual inventory.

 Most items are controlled by the moving average valuation method.
 However, some items are controlled by standard cost and some are controlled by the
FIFO method.

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Perpetual or Non-Perpetual Inventory

Two choices for defining inventory valuation:

 Perpetual Inventory system

 Inventory transactions affect both
stock levels and value
 Automatic entries created in the
general ledger

 Non-perpetual inventory system

 Automatic inventory transactions
affect only the inventory levels
 No effect on stock value
 No automatic entries in the general ledger

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Setup for Perpetual Inventory

Company Details
Basic Initialization

Use Perpetual Inventory

Item Groups Valuation Method Moving Average

Manage Item Cost per Warehouse

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Monetary Value of Inventory Postings

 Inventory Transactions  Inventory Account Balance

Inventory Item

Good Receipt PO

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Monetary Value of Inventory Postings

 Inventory Transactions  Inventory Account Balance

Inventory Item

Good Receipt PO

Delivery
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Inventory Valuation Methods

Moving Average Price

First In – First Out (FIFO)

Standard Cost

Serial / Batch Valuation

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Inventory Valuation Methods

Moving Average Price

5 items @ 10 Total inventory 50 Moving average price 10
5 items @ 20 Total inventory 150 Moving average price 15

First In – First Out (FIFO)

Standard Cost

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Inventory Valuation Methods

Moving Average Price

First In – First Out (FIFO)

5 items @ 10 Unit cost of first layer = 10
5 items @ 20 Unit cost of second layer = 20

Standard Cost

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Inventory Valuation Methods

Moving Average Price

First In – First Out (FIFO)

Standard Cost

Standard cost set at 10

Item cost = 10

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Inventory Valuation Methods

Moving Average Price

First In – First Out (FIFO)

Standard Cost

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Moving Average - Example

Purchasing
 Purchase 5 Units for 100 each
 Unit Cost = 100 Item cost =
 Inventory Value = 500 total inventory
divided by
on-hand quantity
Purchasing
 Purchase 5 Units for 200 each
 Current Unit cost = 150
 Inventory Value = 1500

Sales
 Sell 7 for sales price of 300
 Current Unit cost = 150 Total COGS = 1050
 New Inventory value 450

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 FIFO - Example

Purchasing
 Item cost managed by  Purchase 5 Units for 100 each
layers  Inventory Value = 500

Purchasing
 Each receipt
transaction creates a
 Purchase 5 Units for 200 each
new layer
 Inventory Value = 1500

Sales
 Each release transaction
uses first available open  Sell 7 for sales price of 300
layer  Total COGS = 900 (5 x100 + 2 x 200)
 New Inventory Value 600 (3 x 200)

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Standard Cost - Example

Purchasing Standard Cost Method

 Set manual unit cost to 100 assumes a constant stock
 Purchase 5 units for 100 each value
 Inventory Value = 500

Purchasing Unit cost remains the same

 Purchase 5 Units for 200 each regardless of purchase price
 Current Unit cost = 100
 New Inventory Value = 1000 (Variance of 500)

Sales The difference between

 Sell 7 for sales price of 300 purchase price and standard
 Current Unit cost = 100 Total COGS = 700 cost posts to a variance account.
 New Inventory value 300

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Stock Movements with Standard Cost

Variance

20
Incoming Transactions:
 Goods Receipt
 Goods Receipt PO
 A/P Invoice Inventory Account
 Beginning Quantities
100 100

(Offsetting Account)

120

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Stock Movements with Standard Cost

Variance

20
Incoming Transactions:
 Goods Receipt
 Goods Receipt PO Outgoing Transactions:
 A/P Invoice  Goods Issue
Inventory Account
 Beginning Quantities  Delivery
100 100  A/R Invoice

(Offsetting Account) (Offsetting Account)

120 100

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Set standard cost

 Set standard valuation of item cost in

Inventory Revaluation window.

 When you add a new item with standard

cost, the system prompts you to update the
cost in the Inventory Revaluation window.

 Inventory Revaluation creates a journal

entry automatically (when inventory exists).
This will give you a clear audit trail for all
changes to an item’s standard cost.

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Issuing Items Without a Cost

 You may have items you want to issue

from a warehouse that have not yet been
assigned a cost.

 The Stock Release Without Cost indicator

permits you to do this.

 This is only possible for items set for

FIFO or Average Cost valuation.

 Consult an accountant to verify business

and legal requirements before selecting
this option.

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Inventory Audit Report

Generating Inventory Audit Reports:

 Provides an audit trail for the posted inventory transactions

in the chart of accounts.
 Makes comparisons between the accounting view and the logistics view.
 Explains the value changes in inventory accounts.
 Does not recalculate the item cost but displays the information from the database.
 Displays only inventory related transactions in the report.

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FIFO Layers Report by Consumption Order
Using the FIFO Layers Report by
Consumption Order:

 Provides list of open FIFO layers and

their individual and cumulative values.
 Quantities reflect the current available per
layer, not the original quantity
 Layers are listed in the order in which
they will be consumed.
 Drill down capability to the transaction
that created the FIFO layer is provided.

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Non-Perpetual Inventory System

Definition:
 An inventory management system in which costs of
inventories are not maintained on a constant basis.
 Transactions which reflect the inventory levels do not
generate inventory-related monetary entries directly
into the general ledger.

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Summary (1/2)

Here are some key points:

 You have two choices for defining inventory valuation: perpetual inventory or non-
perpetual inventory.
 A perpetual inventory system automatically controls both stock levels and stock value
by creating automatic journal entries for accounts in the general ledger when items
defined as inventory items are received or released from stock.
 In a non-perpetual inventory system, inventory transactions are automatically created
but affect only the inventory levels and have no effect on the stock value.
 Three methods are available for calculating item cost: Moving Average, First In First
Out (FIFO), and Standard Cost.

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Summary (2/2)

 Using Moving Average: Item cost = total inventory divided by on-hand quantity.
 With FIFO, item cost is managed by layers. Each receipt transaction creates a new layer.
Each issuing transaction uses the first available open layer.
 The Standard Cost Method assumes a constant stock value. Item cost remains the same
regardless of purchase price. Any difference between purchase price and standard cost
posts to a variance account.
 The inventory audit report is useful for viewing changes to inventory quantity and value in
inventory accounts caused by inventory transactions.

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