Item Journal Adjustment with Avg Cost

Ok, someone please explain the accounting logic behind this: Do the following in Cronus Database: 1. Create a new item called TEST with Average Cost. The inventory is setup to per item & location & variant 2. Receive & Invoice TEST on 2/25/03 at 0 cost for 50 quantities 3. Receive & Invoice TEST on 2/28/03 at 0 cost for 100 quantites 4. Negative Adjust TEST on 4/11/05 for 150 quantites 5. Run Adjust Cost Item Entries with posting date of 4/11/05 6. Positive Adjust TEST on 4/11/05 for 150 at $3.00 7. Run Adjust Cost Item Entries with posting date of 4/11/05 When you look at the item card, you’ll notice that the average cost is now $1.50 instead of $3.00. Since I negative adjusted the quantities to 150 to make the inventory 0, then positive adjust the quantities to the proper cost at $3.00. Why does the average cost go to $1.50? I understand that Navision does average costing by date, however, the negative 150 and positive 150 quantities does not compute to the $1.50 cost. What’s going on?!?! [B)]

Hi, You’re right Navision does average costing by date that’s why the average cost is 1.50. Your stock before negative adjustement (step 4): Qty = 50 + 100 + 150, Value = 0+0+450 , so the average cost = 450/150 = 1.50.

Interesting, does that mean that if step 6 Positive Adjust TEST for 150 at $3.00 had been done on 4/12/05 the average cost would be the expected $3.00? And if so, isn’t this a bug when the program generates unpredictable costs? //Pelle

Yes, if the positive adjust is done on 4/12/05, then the average cost will be $3.00. Is there any accounting book on this? This is counter intutitive since the stock after I do the negative adjust is 0. The weighted average cost at this point is 0. Then I put in the 150 quantities at $3.00, then weighted average should be $3.00 since the original 150 quantities does not apply anymore. What does GAAP say on this? Any CPA care fo shed some light on this issue?

as Aloi wrote, the average cost is valuated at “Valuation Date” of your negative adjustment and positive entries are taken into account before negative one. Therefore in your case the three positive entry are summed up to calculate the average cost to assign to your negative entry. To correct that situation you should be able to revaluate your stock at 2/28/03 (or in any date before 4/11/05) and avoid to post negative and positive adjustment on 4/11/05. hope this helps

Ok, I understand how Navision does it’s calculation on the average cost. But does this make any ACCOUNTING sense? Strictly talking accounting here, since I’m not a CPA, is this the proper way to calculate average cost??? [?]

Hi, i have noticed that item 2 & 3 are consider as incomplete transaction where the entries were posted with 0 value. Therefore, you might receive zero (0) value in average cost. A complete transaction should include the quantity and cost. unless you are taking this transaction as Free item, which only involve posting of quantity without cost. real_andi had shown clear coomputation on average cost.