Inventory Item Costing is critical to track the total value of your assets, so you can calculate your profits more accurately.
Does your company manage cost inventory items?
Every organization needs some form of asset inventory management. For retailers or wholesalers, as well as for most ecommerce companies, inventory is usually the largest asset, as well as the largest expense item. It helps companies determine how much profit can be made on the inventory, how costs can be reduced, where changes can be made, which suppliers or items must be chosen and how capital must be allocated.
Inventory management doesn’t just apply to physical items on a shelf to track. Given the nature of service industry providers, a lot of companies can lose sight of the importance of inventory. Service companies also need to track costs for any number of consumable items just to perform a given task.
All of these things cost money and if they are misplaced, spoiled, or even given out free, that money has been lost.
Understanding your costs is vital to increase profits and there are significant benefits to using an inventory tracking system to identify what items are bringing revenue and what items are taking it away.
Using NetSuite for Cost Management
While most companies select their costing method prior to implementing NetSuite, they frequently have questions about how costing is handled by the system.
NetSuite offers multiple costing methods to suit different needs, and understanding how they work will help you choose the right method for your business.
NetSuite calculates costs for items every time a transaction is saved, enabling you to accurately track their cost and the profits from their sales.Tracking your inventory and keeping a tight rein on stock levels also means keeping ahead of the expiration dates on batches of items.
Costing MethodsNetSuite offers seven different costing methods. These include:
- Group Average
Costing v. Cost of Goods Sold
Although these terms are often used interchangeably, they have different meanings. While Item/Inventory Costing is the process of calculating the cost on a transaction, Cost of Goods Sold (CoGS/COGS) is a specific type of general ledger account that is hit when the item is sold. It offsets the Inventory Asset account.
Check out the various costing methods and inventory item types available with NetSuite:
1. Average Costing
This is the default costing method NetSuite uses. It is the simplest and easiest, it recalculates the cost of an item after a transaction is saved, and it is the result of the total inventory cost divided by the item’s quantity. This method uses the principle of Periodic Average Cost Calculation (recalculates the cost daily, at the end of the day), and is the most used by product-based companies.
2. Group Average Costing
While Average Costing is calculated by location, NetSuite also offers the Group Average Cost so companies can average items’ costing across a group of locations defined by the user, as long as they share the same currency. It recalculates the cost of items anytime an item is bought or sold at any of the locations in the group, and is commonly used by retailers in some countries.
3. Standard Costing
In this traditional method, items are assigned a standard cost through a transaction called the Inventory Cost Revaluation. When a transaction is saved for such item, the standard cost is used to impact the general ledger, however when the cost differs from that, special variance accounts are used to record variations. Companies use standard costing to reduce cost fluctuations due to vendor price changes, currency exchange rates, or labor cost changes.
NetSuite considers the following costing methods as “Linked” as every transaction that pulls inventory out is linked to a transaction that brings inventory in, in order to account for the correct cost. Typically, managing a linked method tends to be slower than other methods, maintaining in an ordered list of transactions to be matched.
In the First In, First Out method, as the name says, the cost used follows the order materials are brought in. This way inventory costs are kept current with the most recent costs. Companies that deal with perishable products (food, medicine, etc.), or products subject to obsolescence (designer fashion, seasonal, etc.) commonly use FIFO.
In the Last In, First Out method, the cost used follows the reverse order. Last items brought in are the first ones sold. With this method inventory costs are kept at the oldest purchase costs.
LIFO is used by very few companies. It is not allowed in some countries (prohibited under IFRS due to potential distortions it might have on profitability and financial statements).
This costing method is unique for serialized items, and as the name says, each item’s cost is tacked individually. With NetSuite, this method enables users to also apply other costing methods (Average, Group-Average and Standard).
Lot-numbered items are often used for items that have an expiration date, and within a specific lot, FIFO is used to track costs over time. Like serialized items, lot-numbered items can also use other costing methods with NetSuite (Average, Group-Average and Standard).
Which is the correct method?
All methods of inventory costing are acceptable and there is no single method that is the only correct method since different methods are attractive under different conditions.
It is important to be consistent with the method selected. This enables financial statement users to compare statements of a company from period to period and determine trends.
Why Use NetSuite
Using NetSuite will take less time, cost less money and help you more readily identify the most efficient levels of stock – freeing up capital and all important shelf space. Not only that, it keeps track of the lead times it takes to get new stock from suppliers.
For more on what NXTurn can do for your business, contact our development team. Let us know what we can do to help!