Cost Adjustment: Best Practice, Why they Happen, and Examples

Cost Adjustment: Best Practice, Why they Happen, and Examples

Table of Contents

Cost Adjustment: How-To Best Practice

There are 3 basic requirements before a cost adjustment is run. These will ensure the process will not be interrupted and will be accurate. At this point, all verification of the quantity and value of inventory should be complete.

1. Make sure all daily work is done

2. Make sure everyone is out of AGRIS

3. Do a backup or make a copy of your dataset

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Option 1: Adjust Cost for Usage

• Main option to choose when running cost adjustment

• This option is the balancing routine between the inventory line item detail that flows to the ledger (INVTRAN1) and the total record for each item/location that is balanced to the ledger (INVTOTAL) files

• Creates a transaction in activity file to drive to the ledger

Option 2: Adjust Cost to Market

• Changes the overall inventory value to the lower of cost or market price

• Used when a company is being sold and needs a way to revalue inventory to the agreed upon purchase price

• Will change the value in the average cost field to match the value entered in the market cost field

• WARNING: The market cost field must be maintained or it can zero out the average cost on the item

  • There is a Y/N question in INV > Setup > General Information > Screen 1 that allows you to turn OFF the adjust cost to market option

Instructions for Both Options

• OK through the warning screen to make a backup- this is the waiver that you understand the only fool-proof recovery from a cost adjustment error is a backup

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• Select 1. Calculate Report and Create Entries

  • This will start the process of the cost adjustment

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• Print only items which have an adjustment?

  • This defaults YES so the report is as small as it can be, but to see all detail, answer No

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• Print detail for items which have an adjustment?

  • Defaults to Yes- Always answer Yes to this question.

  • Provides detail to determine if a cost adjustment was accurate, if one is questioned. Without this detail, there is no way to research other than restoring from backup and starting over

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• Ledger Date

  • The date the cost adjustment transaction will be posted to

  • Normally the last day of the accounting month

  • Will flow to the ledger when SJI system entries are processed

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• Other Ref

  • Field name determined in Inventory setup

  • Can be called any name, but is 8 character field to key any information to attach to the transaction, such as the user running

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• Select the printer

  • Always send to the spool!

  • Sending to the spool will remove any chance of losing it due to printer error

  • Never delete it from the spool for at least 1 year, if you must, save it to another location

  • This is the only research tool if you do not agree with an adjustment

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Example of Cost Adjustment for Actual Usage Report

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• The values are calculations based on activity during the period of time selected

  • Beginning Value = ending value from last cost adjustment

  • Ending Value = inventory value now + active delivery tickets

  • Ending Less Beginning = ending value - beginning value

  • Transaction Change Amount = transactions for the cost adjustment period

  • Cost Adj Amount = Ending less beginning - transaction change amount

  • Manual Edit Amount = amount of manual edits to the total file

• Some of these values appear on the inventory item master balance screen in order to aid research

How Cost Adjustments Happen

• The table that holds inventory totals (INVTOTAL or I14_TOTALS_INVENTY) has a balance that does not add up to the table that holds the document line item detail (INVTRAN1 or I04_INV_TRAN and INVTRAN7 or I23_STK_ADD_CHG_DT)

• The cost adjustment works on the rule that INVTOTAL is always correct

  • If INVTOTAL does not match the non cost adjusted INVTRAN1 and INVTRAN7 detail, then it needs an adjustment to make the detail match the total

    • This makes a dollar-only adjustment to the INVTRAN1 file that then affects the Inventory Activity Summary Report and flows to the ledger

  • INVTOTAL or I14_TOTALS_INVENTY viewed under Inventory > Item Maintenance contains the current inventory value/count, or is also visible from the front screen of inventory status inquiry

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  • INVTRAN1 or I04_INV_TRAN and INVTRAN7 or I23_STK_ADD_CHG_DT viewed under Inventory Status Inquiry contains all the line items from invoices, stock additions, etc

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      • The * column specifies if the transaction has been through a cost adjustment. Blank means the transaction has not

      • Based on the highlighted numbers above, the cost adjustment equation becomes:

        • Beg Value + Non-asterisked transactions + active delivery tickets = LDG Detail

          • $46,980 + $4,900 + $0 = $51,740

        • Current Inventory Total – LDG Detail = should be zero

          • $60,000 - $51,740 = $8,530

        • So this means there will be a positive cost adjustment for $8,530, making the ledger detail $51,740 + $8,530 = $60,000

Why a Cost Adjustment May Have Occurred

1. Negative inventory was brought back to zero or positive position

   1. When inventory goes negative, the cost is locked into the last known positive value cost

   2. When the quantity on hand comes back to positive, the inventory value is reset to match the quantity on hand

   3. The cost adjustment will make up for the cost taken while the item was locked into that single cost

2. Manual Edit to the INVTOTAL file through view/edit

3. Lock up error that caused INVTRAN1 or INVTRAN7 file to update line items and not INVTOTAL

4. Changing the unit of measure (UOM) of an item without changing the average cost

5. Cost adjustment that errored out, leaving line items partially marked with asterisks

   1. If you do NOT restore from backup, the cost adjustment starts counting the activity detail from the last non-marked transaction, ignoring anything that already has an asterisk on it

Ledger Effect of a Cost Adjustment

The cost adjustment will debit the inventory asset (IV) and credit cost of sales (CS)

What if I do not agree with the Cost Adjustment?

• Research the issue to determine why you do not agree with it

  • This is where having a copy of the cost adjustment report will be helpful

    • Without this report, we can only guess what happened during the cost adjustment

• If you still feel the adjustment is wrong, a manual ledger entry is the only option

  • Make a manual ledger entry in the opposite dollar amount of the adjustment that flowed to the ledger

Examples: Testing Cost Adjustments

Example 1: Going Negative in Stock

1. Setup a new fertilizer item

2. Add a stock addition for 25 tons at $100 a ton

3. Run a cost adjustment

4. Do a “Begin New Day” process

5. Enter an invoice for 50-tons of product

6. Run a cost adjustment

   1. Be sure to print ALL items, even ones without cost adjustments. Note why the item was not cost adjusted and the detail that was included

7. Begin a new day

8. Enter another stock addition for 50-tons at $300 a ton

9. Run another cost adjustment for all detail. Note the adjustment taken to recover the cost on the sale of inventory that went below negative quantity on hand

Example 2: How Delivery Tickets Affect Cost Adjustment

1. Setup a new seed item

2. Add a stock addition for 25-bags at $50/bag

3. Run a cost adjustment.

4. Do a “begin new day”

5. Enter a delivery ticket for 15-bags of seed.

6. Run a cost adjustment. Note the delivery ticket value added back to the beginning value.

7. Begin a new day.

8. Invoice out the delivery ticket.

9. Run the cost adjustment. Note the difference in the detail that prints and how the invoice is now listed as a document

Example 3: How Edited Stock Additions Affect Cost Adjustment

1. Setup a new fertilizer item.

2. Add a stock addition for 25-tons at $10/ton

3. Invoice out 25-tons of product.

4. Run the cost adjustment.

5. Begin New Day

6. Realize that the fertilizer should have been at $500/ton.

   1. Edit the stock addition voucher to adjust inventory value.

   2. Run the cost adjustment. Note that effect of zero quantity on hand.

   3. The cost adjustment removes the dollars from the asset and drives them to cos