How Should I Track Inventory in Dynamics GP?

A common question we receive is “which method of costing should be utilized to track our inventory?”  Every organization is different, and so is their business processes.  Dynamics GP supports two inventory costing methods:  Standard Cost and Current Cost.

 

Standard Cost

In the simplest terms, Standard Cost is a cost method that is setup manually.  The goal with standard costing is to avoid any rate fluctuations if items are used on the basis of a projected average set by the organization.   Standard Cost is usually modified on a short-term schedule – monthly or quarterly for example.  When items are purchased, the delta between the actual costs and standard costs are posted to variance accounts.  The variance amounts reflect on how often organizations should review and update their standard costs.

Advantage of using Standard Costs

• Improved cost control – If actual costs are greater than standard costs, the variance can be investigated to identify why the costs were higher than projected.
• More useful information for managerial planning and decision making – If standard costs have been established, it can be used for budgets to bid on future jobs and grants more visibility on costing.
• More reasonable and easier inventory measurements – Unusual costs can be identified easily. For example, if a machine malfunction results in increased production costs, they can be tracked by reviewing the standard cost history of the finished good.  Organizations can use standard costs as guidelines for predictive costing.
• Possible reductions in production costs – Using standard cost as a basis, organizations can look for alternatives or substitutions to procure raw materials which are cost effective and meet standard cost guidelines.

 

Using Standard Cost in GP

Standard Costs are typically setup in the Item Master when the items are created for the first time. (Inventory -> Cards -> Items).  Standard Costs are only used with Periodic Inventory Method (FIFO or LIFO).  If using standard cost, a GL Account should be added to track standard cost revaluation (Inventory -> Cards -> Items -> Accounts).  Whenever there is a modification to standard cost, the revaluation account will be used to track changes of the increase or decrease on costing of the available quantities in stock.

 

Current Cost:

Current cost is the last cost the organization used to increase quantity by purchasing an item or performing an increase adjustment.  In other words, current cost = last recorded actual cost.  Current cost is usually used with the perpetual inventory valuation methods.  The only exception to that is if the average valuation method is used, then current cost will be calculated as the average cost of an item instead of the last cost.

Advantages of using current cost:

• Less Variance Analysis – Unlike standard cost, which looks at your variances between standard and actual, current cost produces less variances as the transactions are using up to date cost values of an item at any time.
• Provides leaner information – since the costing information is recent and up to date, it calculates profits more precisely and provides accurate information.
• Simple and more accurate forecasting

 

Using Current Cost in GP

The current cost is set up in the Item Master (Inventory -> Cards ->Items).  Current Costs will be updated automatically, based on the inventory valuation method chosen.  If using FIFO or LIFO Perpetual, current cost will be updated to the latest cost when items are bought or increase adjustments are posted.  If using the average perpetual method, the weighted average cost of the item will be calculated instead.