Adjust Cost - Item Entries: What it is and Why You Need It
Very often on our NAV Support Helpdesk, we receive questions from our user community similar to following:
Why do I see “Original Cost” and “Adjusted Cost” on the Sales Invoice Statistics page? What is the difference between the two?
I received a message when doing [X] that said that my costs needed to be adjusted. What does that mean?
When I run this sales report, the cost amounts and margins don’t look accurate and/or don’t tie-out to my “Cost of Goods Sold” section.
How does NAV apply costs to my sales when I ship Items to my customers?
All of these questions relate back to a standard function within NAV called “Adjust Cost – Item Entries”.
What is “Adjust Cost – Item Entries”?
In a nutshell, this is a process that analyzes the Item Ledger Entries to ensure that all cost layers are accurately applied to sales (and other negative entries), thereby ensuring that the Inventory Valuation and Cost of Goods Sold entries posted within NAV are accurate.
Or stated another way: under most circumstances, if the “Adjust Cost – Item Entries” function has not been run recently in your NAV Company, the Inventory Valuation and Cost of Goods Sold will NOT be accurate.
Is this something I need to run manually? And if so, how often?
Whether or not this is a function that needs to be run manually depends on the setup of NAV. Within the Inventory Setup Page, there are options available that will determine how and when the “Adjust Cost – Item Entries” function is run.
While the “Automatic Cost Posting” field is also related to inventory cost posting, the key field in determining how and when this function is run is the “Automatic Cost Adjustment” value. This value can be changed at any time.
Never: Costs are never adjusted automatically when Item entries are posted. A user must manually run this function, or the function must be set up to run automatically on the NAV Job Queue on a pre-defined frequency (nightly).
Day/Week/Month/Quarter/Year: Costs are adjusted if posting occurs within one Day/Week/Month/Quarter/Year from the work date when an Item entry is posted.
Always: Costs are always adjusted when posting, irrespective of the posting date. This will impact the processing time of each transaction “post”, but depending on the size of the NAV database and other infrastructure considerations, this additional time may be imperceptible to the user.
In terms of how often this function needs to be run, it truly only needs to be run prior to running any reports that analyze inventory value or sales profitability. So before running the Inventory Valuation Report, or Customer/Item Statistics Report, or Account Schedules that analyze financial sales, cost of goods sold, and gross profit.
Aren’t my costs always up to date? What is an example where Adjust Cost is needed?
In brief, assume that this function is always required to accurately determine inventory values and costs. While there are many scenarios that require this function for accurate costing and inventory valuation, the example below is a simple example that demonstrates why the functionality of the “Adjust Cost – Item Entries” function is critical to accurate inventory valuation and costing.
NOTE: In this example, the Inventory Setup is defined per the screen shot above (Automatic Cost Adjustment = Never).
A new Item is set up as follows, with Costing Method = FIFO. At this point, the user manually types in $20.00 as the “Unit Cost” on the Item Card as this is the expected cost of this Item. The “Last Direct Cost” field is blank because the Item has not yet been purchased (invoiced).
1) On January 1, we receive and invoice 100 EA of Item No. 75000 at $20.00, resulting the Item Ledger Entry below. The “Unit Cost” on the Item Card is not adjusted and remains at $20.00
2) On January 15, we receive and invoice an additional 100 EA of Item No. 75000 at $30.00. After this entry is posted, the following Item Ledger Entries exist. The “Unit Cost” on the Item Card is not adjusted and remains at $20.00.
3) On January 16, the “Adjust Cost – Item Entries” function is run. Note below how this function can be run for a specific Item by populating the “Item No. Filter” field or for all Items by leaving this field blank. To automatically generate the related G/L Entries for any cost adjustments created, check the “Post to G/L” box. If you do not check this box, then you must manually run the “Post Cost to G/L” function to post the cost adjustments to the G/L.
The "Unit Cost" field on the Item Card is updated to $25.00.
4) On January 31, a Sales Order for a quantity of 1 EA of Item No. 75000 is entered into NAV. Note on the screenshot below that the “Unit Cost” value from the Item Card is populated into the “Unit Cost” field on the Sales Order Line. While this field is typically not displayed on the Sales Order page, this field is populated and is used to store the expected cost because at this point, NAV cannot be sure which specific cost layer will ultimately be shipped and invoiced against this order. The “Unit Cost” from the Item Card is the most accurate estimate of the eventual cost at this point.
Also, on the following “Sales Order Statistics” Page, both the “Original Cost” and “Adjusted Cost” values are based on the “Unit Cost” values on the Sales Order Lines.
On February 1, this sales order for Item No. 75000 is “Shipped”, and then is “Invoiced”. The result is the Posted Sales Invoice below. Note that the “Unit Cost” field on the Invoice Line was copied directly from the Sales Order line.
The Item Ledger Entries for this item now appear as follows:
Finally, note that when the “Invoice” post was completed, in addition to the reversal of the “Interim” entries created when the Sales Order was “Shipped”, an entry was created to debit “Cost of Goods Sold” and credit “Inventory” for $25.00.
On February 2, the “Adjust Cost – Item Entries” function is run for all Items. This process will adjust the Item Ledger Entries and G/L Entries so that the cost layers are applied accurately. Let’s review all of the entries again to review how they have been adjusted.
The Item Ledger Entries for Item No. 75000 now appear as follows. Note that the “Cost Amount (Actual)” now accurately reflects the fact that the first cost layer was reduced at a cost of $20.00 (not the original $25.00).
The "Cost Amount (Actual)" value is a flow field that sums up the associated Value Entries. By drilling-down on this field, the original value entry as well as the "Adjustment" entry are visible:
The following G/L Entries were posted during the "Adjust Cost - Item Entries" function to reflect the adjustment of cost against this order:
Furthermore, the Sales Invoice Statistics have also been adjusted to reflect the adjusted cost:
However, note that the “Unit Cost” value on the Sales Invoice line has not been adjusted and continues to reflect the original cost even after running the “Adjust Cost – Item Entries” function. For this reason, it is critical that all sales analysis reports and inquiries link back to the Item Ledger and Value Entries to capture the adjusted costs.
Summary
The standard NAV “Adjust Cost – Item Entries” function is critical in ensuring that inventory values and costs are accurate throughout NAV. This function is also very powerful as it enables a variety of scenarios to be processed within NAV that would otherwise not be possible. This demonstration shows why even in a “typical” transaction scenario, this function is a required element to virtually any NAV environment.
