CHAPTER 1: HANDS-ON LAB: INTRODUCTION TO INVENTORY COSTING

Chapter 1: Hands-On Lab: Introduction to Inventory Costing

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CHAPTER 1: HANDS-ON LAB: INTRODUCTION TO INVENTORY COSTING Objectives

The objectives are:

• Introduce the fundamental costing functionality in Microsoft Dynamics® AX 2012.

• Set up an item model group. • Explain each inventory costing model.

Introduction The objective of this Hand-on Lab (HOL) is to explore, at your own pace, the principles of inventory costing in Microsoft Dynamics® AX 2012. This HOL highlights the following topics:

• Setting up item model groups • Selecting an inventory model for your business

Lab time: 55 minutes

Note that hands-on labs for the Inventory Costing and Valuation in Microsoft Dynamics AX 2012 contain dependencies, which means that some data that you set up or create in one lab can be used in other labs. Therefore, it is recommended that you perform all six labs on a single virtual machine (VM) in a sequential order. You can download the VM with Microsoft Dynamics AX 2012 using the following link:

https://mbs.microsoft.com/partnersource/deployment/methodology/vpc/ax2012demotoolsmaterials.htm?printpage=false&sid=va2ynauztj1yuvhufnfo34in&stext=ax%202012%20virtual%20machine

Use the AX2012-A VM with the following credentials:

Account: Administrator Password: pass@word1 (mailto:pass@word1)

Microsoft Official Training Materials for Microsoft Dynamics®

Your use of this content is subject to your current services agreement

Hands-on Lab Costing and Inventory Valuation in Microsoft Dynamics® AX 2012

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Prerequisite Knowledge

To successfully complete this HOL, you will need to have an understanding of how to use the principles and mechanisms from cost management in Microsoft Dynamics AX 2012. Additionally, you must have a general understanding of the basic inventory accounting principles and the underlying inventory costing methods, and valuation principles.

Inventory Costing Functionality In Microsoft Dynamics AX 2012, the inventory costing system provides the effective performance and accuracy of costing and inventory valuation. The value that the inventory is calculated at is determined by the method chosen in the inventory model group.

The standard cost framework used for inventory valuation requires that the inventory close process be performed. The inventory costing system contains tools that include the indirect costs that are involved in the full absorption of production costs and the cost of purchases. Additionally, an overview is made available for all the costs involved in a production or purchase order. The close process also calculates variances on production and purchase order receipts.

Fundamental Cost Issue

A costing issue companies could experience is that they do not necessarily know the cost of their items when they are sold. Sometimes companies must operate with estimated and forecasted costs if they have issues with items before the purchase order (or production order) for the items are invoiced posted.

Companies can handle this issue in two ways.

• Operate with a politically selected cost (standard cost) • Recalculate and adjust the used (estimated) cost when they learn the

actual price of the receipt

System Setup

Before you can calculate the cost of your inventory, many aspects of the system must be configured, including deciding on the costing method(s) to use.

When deciding on the costing method to use, many factors should be considered, such as tax benefits and reporting, financial reporting, and how your inventory should be valued.

If you do not use standard costing for an item, the system will calculate the running weighted average on issue transactions (such as sales orders). Then when you run the inventory close process the transactions will be updated according to the inventory model that you have selected for the item.




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In a standard cost scenario, the system will automatically use the standard cost for both issues and receipts. When the inventory close is processed for these types of item, the system will make adjustments for production variances and close the inventory to prevent the posting of transactions in the prior period.

The following topics review the inventory models that are available in Microsoft Dynamics AX 2012, and how the system makes settlements during the inventory closing process. The Standard cost method is reviewed in more detail in the “Standard Costing Hands-on Lab.”

Scenario: Item Model Groups Item model groups contain settings that determine how items are controlled and handled on item receipts and issues. An item model group can be associated with many different products. This facilitates maintenance, since many products are often controlled with the same setup.

To access this Item model groups form open Inventory and warehouse management > Setup > Inventory > Item model groups.

NOTE: When you set up and assign item model groups to products, be aware of the restrictions that might apply if you change the setup. If a product has open transactions, you might receive a warning and be unable to complete the following tasks.

Change parameters for the associated item model group

Select a different item model group for the product

Exercise 1: Select an Inventory Model

An inventory model typically is assigned to an item when you are finalizing the released product.

To view the inventory models, follow these steps.

1. Open Inventory and warehouse management > Setup > Inventory > Item model groups.

2. Select an inventory model group from the list.



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FIFO

First in, First out (FIFO) is an inventory model in which the cost of the first acquired receipts are settled against the first issue. Financially updated issues from inventory are settled against the first financially updated receipts into inventory, based on the financial date of the inventory transaction.

Considerations when using FIFO

When using FIFO, you have the option of marking inventory transactions so that a specific receipt is settled against a specific issue instead of following the FIFO rule.

It is recommended to use a periodic inventory closing when you use the FIFO inventory model.

The following examples illustrate the effect of using FIFO with three different configurations.

• FIFO without the Include physical value option • FIFO with the Include physical value option • FIFO with marking

Scenario: FIFO Without the Include Physical Value

In this FIFO example, the item model group is not marked to include physical value. The following transactions are illustrated in the FIFO Without Include Physical Value figure later in this section.

Transaction number

Inventory quantity

Cost United States Dollar (USD)

1a (Physical) 1 receipt 10.00 each

1b (Financial) 1 receipt 10.00 each






5a (Physical) 1 issue 20.00 each

5b (Financial) 1 issue 20.00 each



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Each new receipt or issue transaction is designated with a new label. Each vertical arrow is labeled with a sequential identifier, such as 1a.

The identifiers indicate the sequence of inventory transaction postings in the timeline.

Inventory closings are represented by a red vertical dashed line and the label Inventory Close.

Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue.

Scenario: FIFO With the Include Physical Value

If the Include physical value check box is selected for an item in the Item model group form, Microsoft Dynamics AX uses both physical and financial receipt transactions to calculate the running average cost. Where applicable, the system also makes adjustments to the physically updated issue transaction. When the Include physical value check box is cleared, inventory close with the FIFO inventory model will make settlements only to transactions that are financially updated.

The following transactions are illustrated in the FIFO with Include Physical Value figure later in this section.

Transaction number Inventory quantity Cost USD









5b (Financial) 1 issue 21.25 each


Inventory close is performed. Based on the FIFO method, the first financial issue transaction will be adjusted or settled to the first updated receipt, either financial or physical.

Transaction 5b will be settled to receipt transaction 1b. There will be an adjustment of 11.25 USD to this issue transaction. Additionally, transaction 2b is matched to transaction 6a. An adjustment is made in the amount of 1.25 USD .



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When a receipt transaction matches an issue transaction, the valuation method defined in the item model group is disregarded, and Microsoft Dynamics AX settles these transactions to each other.

NOTE: For more information about inventory marking, refer to the Supply Chain Foundation in Microsoft Dynamics AX 2012.

Example: FIFO With Marking

In the following example, it is assumed that FIFO is the inventory model used and that the Include physical value check box is selected. The following transactions are illustrated in the FIFO with Marking Example figure later in this section.

Transaction number Inventory quantity Cost USD









5b* (Financial) 1 issue 20.00 each*


5b*: The inventory financial issue for a quantity of 1 is marked to inventory receipt 2b before the transaction is posted. This transaction is posted at a cost of 20.00 USD each.

Inventory close is performed. Because the financially updated FIFO transaction is marked to an existing receipt, these transactions are settled to each other, and no adjustment is made. Additionally transaction 1b is matched with transaction 6b. An adjustment is made for 11.25 USD. However no settlement is made because transaction 6a is not financially updated.

The new running average cost reflects the average of the financially and physically updated transactions, 27.50 USD.



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The new running average cost after running the inventory close reflects the average of the financially and physically updated transactions at 20.00 USD.

Based on using the LIFO principle and the include physical value selected, which issue transaction(s) will be settled with receipt transaction(s), and by how much will the issue(s) be adjusted?

Exercise 4: LIFO With Marking

Marking with LIFO works in the same general way that marking with FIFO works; this means the settlements are not made using the LIFO principle. Instead, the settlements are made by using the specific transactions that are marked against each other, even if the marked transactions do not follow the LIFO principle.

In the LIFO Marking figure, the item model group is not marked to include the physical value. Additionally, transaction 5b for a quantity of one is marked to the inventory receipt 2b before the transaction is posted.



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1-17

Weighted Average

Weighted average is an inventory model based on the weighted average principle. Issues from inventory are valued at the average value of the items that are received into inventory during the inventory closing period, plus any on-hand inventory from the previous period.

When you run an inventory closing, all receipts are settled against a virtual issue that holds the total received quantity and value. This virtual issue has a corresponding virtual receipt from which the issues are settled, so all issues receive the same average cost. The virtual issue and receipt can be viewed as a virtual transfer, which is named the weighted average inventory closing transfer.

If there is only one receipt, all issues can be settled from it and the virtual transfer will not be created.

When using the weighted average, you can mark inventory transactions so that a specific item receipt is settled against a specific issue, instead of using the weighted average rule.

It is recommended to use a monthly inventory closing when you use the weighted average inventory model.

In Microsoft Dynamics AX, the weighted average inventory costing method is calculated by the following formula.

Weighted average = (Q1*P1 + Q2*P2 + Qn*Pn) / (Q1 + Q2 + Qn)

Inventory transactions leaving the inventory are referred to as issues. This includes sales orders, inventory journals, and production orders, and they occur at an estimated cost on the posting date. This estimated cost is also referred to as running average.

At the time of inventory close, Microsoft Dynamics AX will analyze the inventory transactions for previous and current periods and determine which of the following closing principles should be used.

• Direct settlement • Summarized settlement

Settlements are inventory close postings that adjust the issues to the correct weighted average as of the closing date.




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The following examples illustrate the effect of using weighted average with five different configurations.

• Weighted average direct settlement without the Include physical value option

• Weighted average summarized settlement without the Include physical value option

• Weighted average direct settlement with the Include physical value option

• Weighted average summarized settlement with the Include physical value option

• Weighted average with marking

Example: Weighted Average Direct Settlement Without Include Physical Value

When using the direct settlement principle, the system will settle directly between receipts and issues. There is no parameter to select the direct settlement principle. Instead, Microsoft Dynamics AX uses this direct settlement principle automatically in certain specific situations.

• When one receipt and one or more issues is posted in the period • When only issues are posted in the period and the inventory contains

on-hand items from a previous closing



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1-25

Summary Microsoft Dynamics AX 2012 provides six inventory models for determining the cost of your inventory items. An item model group can be associated with many different products. When the Stocked product flag is not selected for an item model group, the items assigned to that group are not tracked in the inventory.

It is important to carefully consider the item model groups that you will create and select for each item because after transactions are created, you cannot change the item model group.




1-26

Quick Interaction: Lessons Learned Take a moment and write down three key points you have learned from this chapter

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1-27

Solutions Scenario: Item Model Groups

Name the six inventory models that are available in Microsoft Dynamics AX 2012.

MODEL ANSWER:

1. FIFO 2. LIFO 3. LIFO date 4. Weighted average 5. Weighted average date 6. Standard cost

What is the amount of the adjustment that is made for transaction 5b when the inventory close is run?

MODEL ANSWER:

An adjustment of 8.25 USD will be made on the issue transaction because transaction 4b is settled against transaction 5b (30.00 - 21.25 = 8.25).

What is the new running average cost of the financially updated transactions?

MODEL ANSWER:

The new running average cost reflects the average of the financially updated transactions is 15.00 USD because (10 + 20) / 2 = 15.

Based on using the LIFO principle and the include physical value selected, which issue transaction(s) will be settled with receipt transaction(s), and by how much will the issue(s) be adjusted?

MODEL ANSWER:

Transaction 6a will be adjusted to receipt transaction 4b. The system will not settle these transactions because the receipt is only physically updated and it is not financially updated. Instead, only an adjustment of 8.75 USD will be posted to the physical issue transaction. Transaction 5b will be adjusted to physical receipt transaction3a. The system will not settle these transactions because both are not financially updated. Instead, only an adjustment of negative 8.75 USD will be made to this issue transaction.




1-28

In the example provided, the marking is completed before the transaction is posted. Now suppose that the marking is not completed before the transaction is posted.

3. What would the unit price of transaction 5b be at the time of posting? 4. What would be the affect of marking transaction 5b with transaction

2b after transaction 2b is posted?

MODEL ANSWER:

1. 1 @ 21.25 USD 2. An adjustment of 1.25 USD is made to transaction 5b

Which form is used for marking two transactions against each other after the issue is posted?

( ) Marking form (•) Transactions on item form ( ) Inventory transaction adjustment form ( ) Transactions cannot be marked after the issue is posted

After the inventory close is based on using the LIFO date principle with the Include physical value check box selected, what happens to transaction 4b?

MODEL ANSWER:

Transaction 4b will not be settled with transaction 2b because the financial receipt of transaction 2b is not posted. Instead, an adjustment of 6.67 USD will be made on the issue transaction 4b.

Explain why the inventory close transactions 6a and 6b are for a quantity of two.

MODEL ANSWER:

The quantity of two is the current on-hand quantity at the time of the inventory close. This is calculated by taking the sum of the receipts minus the sum of the issues. In this example that is ((3+3+1+1) = 8 for the receipts) minus ((1+1+1+1+1+1) = 6 for the issues) = 2.



Documents

CHAPTER 1: HANDS-ON LAB: INTRODUCTION TO INVENTORY COSTING