8 Define Valuation Methods

This chapter contains the topic:

8.1 Defining Valuation Methods

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From Advanced Stock Valuation (G39), enter 29

From Advanced Stock Valuation Setup (G394), choose Valuation Method Master

You must define the name and attributes for your primary valuation method and each of your auxiliary methods. You need to consider all of your company's valuation requirements prior to setup. These definitions tell the system how to value the stock, what to include in the valuation, and how to display and report the results.

The following descriptions provide an overview of the stock valuation methods available with JD Edwards World systems. Appendix A contains examples with sample data illustrating how the Advanced Stock Valuation system calculates the stock value using FIFO, LIFO, and Weighted Average Cost methods.

Method Description
First In/First Out (FIFO) This method assumes that the first inventory items purchased or manufactured are the first items sold. With FIFO, the cost of the most recently acquired items are the costs associated with the ending balance. The ending inventory and value become the opening for the next period, also known as the carry forward method.
Last In/First Out (LIFO) This method assumes that the last inventory items purchased or manufactured are the first items sold. The most recent inventory costs are assigned to the current period's cost of goods sold, leaving the oldest costs in the balance sheet account.

LIFO accounting is year-to-date, but you can use month-end calculations as check points. Opening inventory for LIFO is calculated at the end of the year, so the opening inventory is the same throughout the year.

LIFO accounting requires an understanding of inventory layers and inventory liquidation. Receiving or increasing inventory from one period end to the next results in a new LIFO layer. If a net decrease in inventory occurs from one period end to the next, no new layer is added. However, the prior period's layer is liquidated or reduced by the decrease amount.
Weighted Average Cost This method calculates the inventory on a weighted average of all the purchases. Sales order costs depend upon the current average cost, rather than the period cost.

In Average Cost accounting, the average cost for all receipts are calculated first without considering when the outgoing transaction occurred. The incoming transactions represent the true value of the stock, since this is what was paid for the items.

After all of the incoming transactions are calculated, the outgoing transactions are valued based on that amount to calculate the true cost of goods sold.
Replacement/Current Cost This method reflects the current value of inventory for a given period. In effect, it is the cost of replacing the inventory for a specific period. You can specify the cost that will be used during the valuation, instead of using a calculated cost.

It is not unusual for a company to need more than one method for valuating stock. For example, local governments might require a different method for financial reporting than the method that you use within the company. Taxes might require a different method than used for profitability reports within a company.

With the JD Edwards World Advanced Stock Valuation system, you can choose one primary method of stock valuation per company to update the general ledger for standardized accounting and reporting. However, you can also assign auxiliary methods to use for comparison or other reporting purposes.

To define valuation methods

On Valuation Method Master

Figure 8-1 Valuation Method Master screen

Description of Figure 8-1 follows
Description of "Figure 8-1 Valuation Method Master screen"

  1. Complete the following fields:

    • Valuation Method

    • Description

    • Valuation Type

    • Within Branch or Company

    • Include Accommodations

    • Include In-transit

  2. In you are using receipts routing, complete the following field:

    • Include Not in Stock

  3. If the valuation method is LIFO, complete the following field:

    • LIFO Adjustment

  4. If the closing inventory quantity is negative for the period:

    • Negative Replacement Use Code

Field Explanation
Valuation Method A two-character abbreviation for the methods that the system uses to determine the value of your company's stock for reporting and financial purposes. Examples include: FI (FIFO), F2 (FIFO Detail by Branch), and LI (LIFO).

When you run the Stock Valuation Extraction program, the system updates the Stock Valuation Detail tables for the assigned valuation methods.
Description A brief description of an item, a remark, or an explanation.

Form-specific information

For Advanced Stock Valuation

The valuation method for the code in the Valuation Method field. Examples include FIFO, FIFO Detail by Branch, and LIFO.
Valuation Type A hard-coded user-defined code (system 39/type VA) indicating the type of valuation method to use in stock valuation. Valid values are:

FIFO Valuation

LIFO Valuation

Weighted Average Valuation

Replacement/Current Cost
Summary/Detail Layer by Period A code that indicates whether the layers are created in detail or summary mode. Valid codes are:

D – Detail mode, which creates one layer per transaction

S – Summary mode, which creates one layer per:

Branch, item or pool, valuation method, and period if you set the Allocation Within Branch/Company field to B (branch)

Company, item or pool, valuation method, and period if you set the Allocation Within Branch/Company field to C (company)

If you select S, the system's processing time depends on the size of the Item Location table (F41021).

At the end of the year, the system rolls all detail layers and period summary layers into one layer.
Allocation by Branch/Company A code that identifies how the system allocates the historical layers built by the valuation method. Valid values are:

1 – Within company. The system creates one record per company, item or pool, valuation method, and period. Additionally, it creates records by branch that are informational only and are not posted to the general ledger.

2 – Within branch. The period detail contains one record per branch, item or pool, valuation method, and period.

At the end of the year, the system rolls all detail layers and period summary layers into one layer.
Include Accommodations A code that indicates if you want accommodations included in this valuation method. Accommodations are the net value of loan and borrow transactions between your company and business partners. Valid values are:

Y or 1

Yes, include accommodations (default).

N or 0

No, do not include accommodations.
Include In-transit A code that indicates if the system should include in-transit stock in the valuation. Valid values are:

Y or 1

Yes, include stock currently in transit to a customer in the calculation of stock value.

N or 0

No, do not include stock that is in transit in the calculation of stock value.
LIFO Adjustment A LIFO adjustment removes the effect of any accumulation or depletion at the end of a reporting period. It should not be applied for the closing period of a fiscal year. You should record the LIFO adjustment against the income statement and balance sheet accounts.

The system uses the following formula to determine the LIFO adjustment:

(Average cost of the accumulation/depletion - current period's average cost) * accumulation/depletion

If this valuation method is a LIFO method type and set up as a company-wide method, you might want the system to calculate a LIFO adjustment. Valid values are:

Y or 1

Yes, this is a company-wide LIFO valuation method. Include the LIFO adjustment calculation. This is the default.

N or 0

No, this LIFO method is either layered within a branch/plant or is not company wide. Do not include the LIFO adjustment.
Inbound In transit Enter a Y if you wish to include products that are currently in route to your inventory but have not arrived yet in the calculation of stock value.

Enter an N if you wish not to include products in route.
Include Not in Stock Enter a Y if you wish to include products that are currently in route to your inventory but have not arrived yet in the calculation of stock value.

Enter an N if you wish not to include products in route.
Negative Replacement Use Code Enter the Item Pool code to indicate which costing method to use.

8.1.1 Processing Options