Periodic Average Cost Adjustments
Value adjustment and opening cost override are the periodic average cost adjustments that you can create using the Manage Periodic Average Cost Adjustments task.
The periodic average cost can be adjusted by user created adjustments or automatically based on business events, such as invoice price changes. You can create the periodic average cost adjustments listed here:
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Value Adjustment: You can adjust the inventory value by specifying an amount as the adjustment. This adjustment value is then used to calculate the periodic average cost. An example of value adjustment could be a rebate that you received and need to be apply on all the inventory quantities.
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Opening Cost Override: You can define a new cost for the opening balance of the period. If you don’t want to use the prior period cost, you define an opening cost override that the cost processor must use to calculate the periodic average cost for the period. This is also useful when you want to define a cost for a newly transacted item. When defining the opening cost override, you can select the cost elements that you would like to change and specify the new cost for each cost element. A use case where you would want to define an opening cost override is that the prior period cost was defaulted to 0 due to negative inventory. You aren’t comfortable using 0 as the prior period cost and want to use a new cost.
If you've defined an opening cost override and value adjustments for a cost organization, cost book, item, valuation unit, and period combination, then the formula to calculate the periodic average cost for the item will be:
Periodic Average Cost = [(opening cost override * prior
period ending balance) + SUM (transaction cost * transaction quantity) + overheads +
value adjustments] / (prior period ending balance +
transaction quantity for this period)
You can create, update, and delete adjustments only if the corresponding period is in the Open or Pending close status. Also, you can’t update or delete an opening cost override after it has been processed, even if the corresponding period is in the Open or Pending close status.
After you create and process the adjustments by running the Create Cost Accounting Distributions process, you can check the processing results, including any warning or error messages, on the Review Cost Accounting Process page. You can view the corresponding accounting entries on the Review Cost Distributions page. Also, you can check the updated periodic average cost of the item on the Review Item Costs page.
For a consigned PO, any retroactive pricing is considered as a value adjustment and created on Trade In-transit Receipt (TIR). This can be seen in the Review Cost Accounting Distributions page. This adjustment is then propagated to Transfer to Owned Receipt. However, such propagated adjustments can’t be seen on the Review Transaction Costs page.
Variance and Automatic Adjustments
The automatic adjustments include:
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Acquisition cost adjustments due to invoice price variance, landed costs, purchase order price changes, and so on.
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Variance adjustments are created when either the inventory value is negative or the total quantity is less than or equal to 0.
The table lists the scenarios and the corresponding variance calculation to ensure that the periodic average cost isn't negative.
| Total Quantity | Total Inventory Value | Variance Calculation | Periodic Average Cost |
|---|---|---|---|
| > 0 | > 0 | No variance | > 0 |
| < 0 | < 0 | No variance | > 0 |
| > 0 | < 0 | Variance gain to bring inventory value to 0 | = 0 |
| < 0 | > 0 | Variance loss to bring inventory value to 0 | = 0 |
| = 0 | > 0 | Variance loss to bring inventory value to 0 | = 0 |
| = 0 | < 0 | Variance gain to bring inventory value to 0 | = 0 |
In the table, based on the period average cost calculation formula,
Total Quantity = (prior period ending balance + transaction quantity for this period)
Total Inventory Value = [(prior period average cost * prior period ending balance) + SUM (transaction cost * transaction quantity) + overheads + adjustments]
The variance is calculated afresh every time the periodic average cost is recalculated.
The periodic average cost of an item is the average cost for the item in a given period for a cost organization, cost book, and valuation unit combination. This is the formula to calculate the periodic average cost by considering the variance:
Periodic Average Cost = {[(prior period average cost * prior period ending
balance) + SUM (transaction cost * transaction quantity) + overheads + value
adjustments + periodic cost inventory value variance] / (prior period ending
balance + transaction quantity for this period)} + unit cost
adjustments
Let's go through few examples to understand how the variance is accounted in the periodic average cost.
Example: Quantity greater than 0 and on-hand value less than 0
Consider the following transactions.
| Date | Transaction | Quantity | Cost | On-Hand Quantity | On-Hand Value |
|---|---|---|---|---|---|
| 01-Feb | Opening balance | 100 | 10 | 100 | 1000 |
| 05-Feb | PO Receipt | 50 | 15 | 150 | 1750 |
| 10-Feb | Return to Supplier | -100 | 20 | 50 | -250 |
| 28-Feb | Variance | 250 | |||
| 28-Feb | Period end balance | 50 | 50 | 0 |
Periodic Average Cost = {[(10 * 100) + SUM ((15 * 50) + (20 * (-100))) + 250] / (100 + 50 - 100)}
Periodic Average Cost = {[(1000) + SUM (750 - 2000) + 250] / (50)}
Periodic Average Cost = {[1000 - 1250 + 250] / (50)} = 0
Example: Quantity less than 0 and on-hand value greater than 0
Consider the following transactions.
| Date | Transaction | Quantity | Cost | On-Hand Quantity | On-Hand Value |
|---|---|---|---|---|---|
| 01-Feb | Opening balance | 100 | 10 | 100 | 1000 |
| 05-Feb | PO Receipt | 50 | 15 | 150 | 1750 |
| 10-Feb | Return to Supplier | -200 | 5 | -50 | 750 |
| 28-Feb | Variance | -750 | |||
| 28-Feb | Period end balance | -50 | -50 | 0 |
If the on-hand quantity is negative at the end of the period, this might lead to a negative cost. To ensure that the cost doesn't turn negative, a variance adjustment is created to ensure that the cost becomes 0.
Periodic Average Cost = {[(10 * 100) + SUM ((15 * 50) + (5 * (-200))) + (-750)] / (100 + 50 - 200)}
Periodic Average Cost = {[(1000) + SUM (750 - 1000) - 750] / (-50)}
Periodic Average Cost = {[1000 - 250 - 750] / (-50)} = 0
Example: Quantity is 0 and on-hand value greater than 0
Consider the following transactions.
| Date | Transaction | Quantity | Cost | On-Hand Quantity | On-Hand Value |
|---|---|---|---|---|---|
| 01-Feb | Opening balance | 100 | 10 | 100 | 1000 |
| 05-Feb | PO Receipt | 50 | 15 | 150 | 1750 |
| 10-Feb | Return to Vendor | -150 | 5 | 0 | 1000 |
| 28-Feb | Variance | -1000 | |||
| 28-Feb | Period end balance | 0 | 0 | 0 |
Periodic Average Cost = {[(10 * 100) + SUM ((15 * 50) + (5 * (-150))) + (-1000)] / (100 + 50 - 150)}
Periodic Average Cost = {[(1000) + SUM (750 - 750) - 1000] / (0)} = 0
Example: Quantity is 0 and on-hand value less than 0
Consider the following transactions.
| Date | Transaction | Quantity | Cost | On-Hand Quantity | On-Hand Value |
|---|---|---|---|---|---|
| 01-Feb | Opening balance | 100 | 10 | 100 | 1000 |
| 05-Feb | PO Receipt | 50 | 15 | 150 | 1750 |
| 10-Feb | Return to Supplier | -150 | 15 | 0 | -500 |
| 28-Feb | Variance | 500 | |||
| 28-Feb | Period end balance | 0 | 0 | 0 |
Periodic Average Cost = {[(10 * 100) + SUM ((15 * 50) + (15 * (-150))) + 500] / (100 + 50 - 150)}
Periodic Average Cost = {[(1000) + SUM (750 - 2250) + 500] / (0)} = 0