Comments on: Understanding QuickBooks Total Bill of Materials Cost

By: Charlie

Charlie — Fri, 22 Oct 2010 19:02:57 +0000

When the item has reached zero, the average cost has no meaning. There is no quantity on hand, so it is just the last average cost used.

The scenario that I ran through before was a simple test that I created, with a new item, and it worked exactly as I outlined above. If you are seeing something different then there may be other issues – a damaged company file, a history that has some negative on hand balances at some point, or some other issue. Try doing a “rebuild” of your company file to see if that straighten’s things out, and review the qbwin.log to see if you have errors.

Also try creating a new company file and adding an item, run through the scenario that I outlined.

Note that I tested this with Premier 2011, but it has always worked that way. Without hands on your file, there isn’t more that I can say other than “it works for me”…

By: Jerry

Jerry — Fri, 22 Oct 2010 18:49:33 +0000

Charlie: When you sell the 20 items bringing the inventory level to 0, you will see the average cost for that item hasnt changed. Adding additional units at a different price only adjusts the average cost, not establishing a new one.

By: Jerry

Jerry — Fri, 22 Oct 2010 18:30:48 +0000

That is not what is happening in my QB2008 Pro. I maintain 0 inventory in most products and when additional items are purhased, the cost of that item is averaged with the average cost shown in the item. Your resonse indicates that that average cost will change to the new item cost when the inventory is 0. Not happening, Charlie but I will review it again. Thanks.

By: Charlie

Charlie — Fri, 22 Oct 2010 16:45:40 +0000

If you bring the quantity of the item down to zero, then purchase new parts, only the cost of those new purchased parts are included in the averaging.

I can create a new item, receive 10 at $1.00 each. Avg cost is $1.00

Ican recieve 10 of that item at $2.00 each. Avg cost is $1.50

I can sell 20 items, so the quantity is zero.

I can receive 10 of that item at $2.00 each. Avg cost is $2.00 – only affected by this last purchase.

By: Jerry

Jerry — Fri, 22 Oct 2010 14:31:04 +0000

Charlie: Not to beat a dead horse; as a non accountant, I do realize that the average cost is needed to put a value on existing inventory but when the item is depleted, why do new purcases continue to be averaged? This affects sales as the average cost is used to determine gross profit. Although an adjusting factor is used to adjust this, it seems a poor way to do this.

By: Charlie

Charlie — Wed, 20 Oct 2010 17:37:03 +0000

Jerry, on the surface, it sounds like you have the right idea. I just don’t have a QUICK fix for you. As you buy a new item: take the old item, rename it to the same name along with a prefix or suffix (add a “+” or “old” or something), make it inactive, then add the item with the original name and set it up as non inventory part. If you do that as you go along, you eventually change things over.

That might not work well in some cases. The other way is to export the items, rename each item individually in the item list and make it inactive, then reimport the item list with the new item type to add them back.

I can’t say which makes sense without knowing a lot more about your business.

By: Jerry

Jerry — Wed, 20 Oct 2010 17:09:35 +0000

Thanks for your quick response. My real concern is I have been using “Inventory Item” incorrectly forever and the average cost feature is affecting us adversely. We do not maintain any inventory and most items are purchased for specific orders. By using “non inventory part”, I eliminate the average cost feature. Is there some easy way to adjust the average cost to actual cost when purchased. I realize QB does not use LIFO or FIFO. Any thoughts?

By: Charlie

Charlie — Wed, 20 Oct 2010 16:13:57 +0000

Jerry, because of the difference in how they are handled for accounting purposes, and the fact that Intuit keeps all transactions forever (more or less), you can’t make that change. You have to reenter the items. You can export to Excel, change the “type”, then import them back in, but you have to either rename them before reimporting, or rename (or delete) the old ones first. Note that you can’t delete the items if you have used them in transactions, you can only make them “inactive”.

By: Jerry

Jerry — Wed, 20 Oct 2010 15:03:54 +0000

Charlie: I need to change most items from inventory item to non inventory part. Is there a simple way of doing this or do I have to re-enter each item?

By: Charlie

Charlie — Thu, 07 Oct 2010 16:40:59 +0000

Pablo, the average cost of the assemblies is based on the average costs of the items used in the assemblies, at the time the assemblies were built. If you have rising component costs then the average cost of assemblies built in the past will be lower than the current cost to build items. That is the nature of things and of how average costing works.

You can adjust historical costs by using an “inventory value adjustment” (see http://qbblog.ccrsoftware.info/2009/06/quickbooks-inventory-quantity-and-value-adjustments/ ), but that is revaluing your inventory. That change in cost in your inventory asset account will affect the average cost of either the components or the assemblies, but it has to come from somewhere. What COA account would you post the difference in cost to?

Unless there is an error in receipts you entered in the past, or some other kind of functional data entry error, you normally wouldn’t be adjusting your inventory costs.

Your financial advisors may want to make a periodic adjustment to inventory valuation to reflect changing costs, but that is something you would have to discuss with them.