TechKnowledge Content
Cost Variances
When purchasing and selling inventory items using Purchase Order Processing and Sales Order Processing, you may encounter four situations in which a cost variance is calculated. Each of these situations has different characteristics; not all situations will print on the Cost Variance Journal and not all four post to General Ledger automatically.
The four situations are as follows:
1.An inventory item contains an override (a negative quantity on hand). The items are taken out of inventory at the current cost. When the inventory item is purchased, and the quantity becomes positive, the cost of the item may be different then the current cost.The overridden items were sold out using an incorrect cost.
2.An inventory item is on a purchase order, but does NOT have a negative quantity on hand. A shipment is received against the purchase order at one cost.When we receive the invoice, the vendor charged us a different cost (either higher or lower).
3. An inventory item is on a purchase order, but does NOT have a negative quantity on hand. A shipment is received against the purchase order at one cost. Before the invoice is received for the shipment of goods, we sell the item to a customer in Sales Order Processing. The items are sold using the cost on the shipment. When we receive the invoice from the vendor, they charged us a different cost.The items were sold out using an incorrect cost.
4.An inventory item is setup with a valuation method of LIFO or FIFO Periodic. Periodic valuation methods used the standard cost when selling items out of inventory.If the item's actual cost (when using Purchase Order Processing) is different then the item's standard cost, a variance will be calculated.
Example of Situation 1
Inventory shows a quantity on hand of -10 for our ink pen. When the item was sold, causing the override of 10, inventory and cost of goods were updated using the current cost of the item, which at the time was $1.00
Next, we purchased 20 ink pens @ $1.25 each. The shipment and invoice in Purchase Order Processing were both posted with $1.25 as the cost. Posting this increase will cause the Cost Variance Journal to print during the posting process. The Cost Variance Journal prints because the 10 pens were originally sold at a COST of $1.00 but should have been sold with a cost of $1.25.
|
Type |
Amount received |
Amount sold |
Cost |
Quantity on hand |
Value remaining |
|---|---|---|---|---|---|
|
Override |
0 |
10 |
$1.00 |
-10 |
($10.00) |
|
Purchase |
20 |
0 |
$1.25 |
0 |
$12.50 |
The report shows the variance between the override unit cost of $1.00 and the shipment/invoice cost of $1.25. The report will also list the number of units the variance is for, 10.
The variance needs to be manually posted in General Ledger to Cost of Goods Sold and Inventory. These accounts were posted to with an incorrect amount during the override transaction.
The following manual adjustment needs to be posted in General Ledger.
|
Account |
Debit amount |
Credit amount |
|---|---|---|
|
Cost of Goods Sold |
$2.50 |
0 |
|
Inventory |
0 |
$2.50 |
The Cost Variance Journal will print anytime an increase in quantities is posted to inventory for an item for which an override document exists.
An increase results from any of the following:
Return document in Sales Order Processing
Return document in Invoicing
Shipment document in Purchase Order Processing
Shipment/Invoice document in Purchase Order Processing
Increase Adjustment, Increase Variance or All Transfer documents in Inventory.
Example of Situation 2
We purchase 10 ink pens using Purchase Order Processing. The shipment of ink pens is received, but we didn't receive the invoice. Because the invoice wasn't included, we estimate the cost of the ink pens as $1.00 when we enter and post the shipment. The following transaction results when the shipment is posted.
|
Account |
Debit amount |
Credit amount |
|---|---|---|
|
Inventory |
$10.00 |
0 |
|
Accrued Purchases |
0 |
$10.00 |
Two days later, and after the shipment has been posted, we receive the invoice. The invoice shows the cost of the pens as $1.25. The following transaction results when the invoice is posted.
|
Account |
Debit amount |
Credit amount |
|---|---|---|
|
Accrued Purchases |
$10.00 |
0 |
|
Purchase Price Variance |
$2.50 |
0 |
|
Accounts Payable |
0 |
$12.50 |
In this example, a different cost variance report prints; the POP Invoice Cost Variance Journal is printed to notify you that a variance did exist between the shipment and invoice.
The variance has been posted as part of the regular transaction. The Purchase Price Variance account debit represents that cost difference.
The notation on the POP Invoice Cost Variance Journal is correct; no adjustment needs to be made to Cost of Goods Sold or Inventory because no ink pens were sold in between the time of the shipment and invoice.
Example of Situation 3
We purchase 10 ink pens using Purchase Order Processing. The shipment of ink pens is received, but we didn't receive the invoice. Because the invoice wasn't included, we estimate the cost of the ink pens as $1.00 when we enter and post the shipment. The following transaction results when the shipment is posted.
|
Account |
Debit amount |
Credit amount |
|---|---|---|
|
Inventory |
$10.00 |
0 |
|
Accrued Purchases |
0 |
$10.00 |
Two days later, and before the invoice has been received, a customer purchases five pens. The invoice for the sale is entered in Sales Order Processing. The invoice shows the price of the pens as $3.00 and the cost of the pens as $1.00.
After the sale, we finally receive the invoice from the vendor on the Purchase Order Processing transaction. The invoice shows the cost of the pens as $1.25. The following transaction results when the invoice is posted.
|
Account |
Debit amount |
Credit amount |
|---|---|---|
|
Accrued Purchases |
$10.00 |
0 |
|
Purchase Price Variance |
$2.50 |
0 |
|
Cost of Goods Sold |
$1.25 |
0 |
|
Accounts Payable |
0 |
$12.50 |
|
Inventory |
0 |
$1.25 |
In this example, the POP Invoice Cost Variance Journal is printed to notify you that a variance did exist between the shipment and invoice, just like example 2.
The adjustments to the Inventory and Cost of Goods Sold accounts are to adjust for the item being sold at a different cost than it is invoiced at.
The variance has been posted as part of the regular transaction. The Purchase Price Variance account debit represents that cost difference.
Notice on this report that there isn't a note in the body of the report; no manual adjustment needs to be made to Cost of Goods Sold or Inventory because it has already been posted as part of the Purchase Order invoice distributions. In this example, both the variance to COGS/Inventory and the variance in the shipment/invoice have been automatically updated.
Example of Situation 4
We created a new item in inventory, the computer desk. The computer desk is defined with a valuation method of FIFO Periodic. Because all periodic valuation methods use the standard cost, a standard cost of $40.00 is entered. There is currently no quantity on hand.
In Purchase Order Processing, a purchase order is entered for five computer desks. When the shipment is received, the computer desks cost is entered as $45.00 each. The following transaction results when the shipment is posted.
|
Account |
Debit amount |
Credit amount |
|---|---|---|
|
Unrealized Purchase Price Variance |
$25.00 |
0 |
|
Inventory |
$200.00 |
0 |
|
Accrued Purchases |
0 |
$225.00 |
The invoice is received and entered for $45.00 each. The following transaction results when the invoice is posted.
|
Account |
Debit amount |
Credit amount |
|---|---|---|
|
Purchase Price Variance |
$25.00 |
0 |
|
Accrued Purchases |
$225.00 |
0 |
|
Unrealized Purchase Price Variance |
0 |
$25.00 |
|
Accounts Payable |
0 |
$225.00 |
Nothing prints on the cost variance report when either the shipment or invoice are posted.
The variance has been posted as part of the regular transaction. The Purchase Price Variance account debit represents that cost difference.
This article was TechKnowledge Document ID:22397
The issue that is described in the Issue section does not apply to Microsoft Dynamics GP 10.0.
