How is cost and value computed
How are Retail Cost of Sales and Value computed?
What is Reorder Cost versus Unit Cost vs Average Cost?
The cost of sale is computed the moment of the sale and is realized when the sale revenue is realized. It can use the Reorder Cost or the Average Unit Value. The Reorder Cost comes from the detail page of a retail inventory item, The average cost is a computation using the Style's SCW Receive history entries and what system settings are enabled.
System Settings is in the System Setup form
Other Settings Tab -> Settings -> Inventory Costing FIFO or LIFO General/clock Tab -> Apply Vendor discount to cost at sales time General/clock Tab -Use Average unit value for stock sale cost
The Average Unit Value is calculation
ProfitSystem uses the Inventory Style - SCW - Receive history for an inventory item to compute the average unit cost automatically. Each time you receive stock inventory, ProfitSystem records the quantity received and the unit cost. It keeps this history as you receive more inventory. Assume this is your receive history for style 100, size 10, color white.
| Date Recv | Qty Recv | QOH | Unit Cost |
|---|---|---|---|
| 1/1/2011 | 25 | 25 | $100.00 |
| 2/12/2011 | 25 | 25 | $150.00 |
At this point, your average unit cost is ((25 * 100) + (25 * 150)) / 50 = $125. Now, you sell 10 units and are on FIFO inventory costing (May use LIFO instead of FIFO - which is set in System Setup -> Other Settings -> Inventory costing)
| Date Recv | Qty Recv | QOH | Unit Cost |
|---|---|---|---|
| 1/1/2011 | 25 | 15 | $100.00 |
| 2/12/2011 | 25 | 25 | $150.00 |
Now, your average unit cost is ((15 * 100) + (25 * 150)) / 40 = $131.25.
At any point, you can tell how many you have left at each cost. ProfitSystem remembers how many you originally received at each time, and how many are left from each batch. Once you sell all the ones received on 1/1/2011, ProfitSystem will start using the QOH for the 2/12/2011 ones.
Value
Now, to compute the value we look at each receive history entry. For each receive history entry we compute the value as:
Cost Factor % * (Unit Cost – (Unit Cost * Vendor Discount %)) * Qty On Hand
For a special order, which is ORDER status on a SALE, the inventory Reorder Cost is used for the cost of sale. For a stock sale, which is status IN or TAKEN, the program can use the Average Unit Value or the Unit Cost from the Receive History. There are systems setting, 'Use the average unit value for stock sale cost, instead of unit cost from Receive History?'. If this is checked, then it will use the Average Unit Value. If not, it will use the unit cost from the Receive History.
Stores whom utilize the ProfitSystem Cost Factors to depreciate their Inventory Value of older or dead merchandise should also report the lower depreciated Value as Cost of Sales when those items are sold from stock. When reporting you inventory value utilizing Cost Factors, then when the item is sold, the value being reported should be used for the cost (work with your CPA on this - it is an accounting thing)
There is a system setting System Setup -> General/Clock -> Use Average unit Value for Stock sale cost, instead of unit cost from Receive History. Enabled this setting applies the COST FACTOR setting to the average cost and records the result to the Sale.
Failure to report Cost of Sales at the new lower Value results in overstating the Cost of Sales, thus reducing the store’s potentially taxable margin. Using the original cost of merchandise ignores this fact. The taxable effect, at least in part, is to take two deductions 1) for inventory write down and 2) for higher Cost of sale - COS, which would cause a significant issue for the shop in case of an tax audit.
Most reports include the inventory value or unit cost. The inventory value computation is documented in Inventory Maintenance - Display Inventory Value.