Inventory Cost Accounting to control Revenue
Introduction
There are three methods of Inventory Re-Valorization after a Purchase Order changed the cost given for a product.
1) LIFO: Last In and First Out. This method takes the last lot of product from the warehouse with the last cost. The advantage is that it keeps the buying capacity in case the cost has risen. The problem is if the cost got down, the buying capacity of more products is affected.
2) FIFO: First In and First Out. Takes the first lot of product from the warehouse with the first cost.
3) Average: Uses the formula: ((QuantityLot1*CostLot1) + (QuantityLot2*CostLot2)+(QuantityLot1*CostLot1))/(Total Quantity)
In all three cases, the revenue is impacted because of the inventory revaluation is different from the real cost of the Purchase Order from the Provider.
It is important that every Sale keeps track of the Product Lot and the Purchase Order Cost to know exactly what was the revenue.
The software needs the product lot data field and relationship with the Purchase Order and cost.
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Figure 1 Chart with different costs from the Purchase Costs depending on the used method.
Figure 1
a) Inventory Revaluation method explanation
a.1) Purchase Order One
Ten units IN. The FIFO, LIFO, and Average are the same as Purchase Order cost. See figure 2.
Figure 2
b) Purchase Order Two
IN 5 units and new exists in Inventory of 15 units. The Purchase Order cost is 475. First In/First Out cost is kept in 450. The Last In/First Out is now the new cost of 475. The average comes from the formula: ((10*450)+(5*475))/15) equals to 458.33. Review figure 3.
Figure3
c) Purchase Order Three
IN 3 units and new exists in Inventory of 18 units. The Purchase Order cost is 500. First In/First Out cost is kept in 450. The Last In/First Out is now the new cost of 500. The average comes from the formula: ((10*450)+(5*475)+(3*500))/18 equals to 465.27. Review figure 4.
Figure 4
d) Sales. Impact on Revenue depending on Costs
The Sales Table, figure 5 demonstrates the cost difference between the real Cost of Purchase Order with LIFO, FIFO, and average. This is the reason because no matter what method of Inventory revaluationis used, it is important to keep track of the Product Lot and it's Purchase Order Cost to have the exact cost/revenue of the sale.
Look at Figure 5 to check the difference between the Real Cost and FIFO, LIFO and Average methods.
Also check the sale price, fixed in 800. So the revenue will be different depending on the revaluationmethod.
Figure 5
Figure 6 shows the different revenues for the same product, depending on the revaluationmethod used. Green bar is the quantity multiply by the sale price. Total of Average Cost, FIFO and Lifo shows the different costs methods values.
Figure6
Conclusion:
Figure 6 demonstrates that no matter what cost revaluationmethod, the revenue is impacted by the difference between one and another.
To know the exact revenue for every invoice it is necessary to keep tracking the product lot and know what is the original Purchase Order cost. Otherwise, this detailed data is lost after revaluationand after a sale.