Special Considerations

Before beginning Initial Setup and prior to making any substantial changes to your system, your company should consider several issues and options that may affect system operation. The following topics provide information which should be considered when installing Inventory Control:

  • Online Updating
  • Audit Trail
  • Cost/Quantity Updating in Inventory Control
  • LIFO Implementation
  • Estimated Freight Option
  • Unit Types
  • LIFO/FIFO Costing

Once you have resolved these issues, follow the steps outlined in Basic Steps for Initial Setup.

Before beginning Initial Setup, you need to consider several options that may affect your system's operation. The Special Considerations section includes discussion of accounting design issues and some optional features, which allow you to tailor your system to your particular organization. The following paragraphs describe these system options.

Online Updating

Inventory quantities in the Products by Warehouse file are updated online by the following transaction entries:

  • Material Requisitions
  • Inventory Receipts
  • Adjustments
  • Warehouse Transfers
  • Product Transfers

If the Purchase Orders application is part of the system, the following transaction entries in that application update the Products by Warehouse file on line:

  • Purchase Orders
  • Purchase Order Receipts

If the Order Entry application is part of the system, the following transaction entries in that application update the Products by Warehouse file on line:

  • Sales Orders
  • Shipping Confirmations

These online updates are affected by the application chosen to update costs and quantities (see the Cost/Quantity Updating section, later in this manual) and by the other applications to which Inventory Control posts.

Audit Trail

Unlike journals in other APPX applications, journals in the Inventory Control application do not serve as the primary audit trail for transaction entries. Inventory Control journals show quantities for transactions but do not show the associated dollar amounts. This is because the associated costs to be applied to these quantities may change between the time a transaction is entered or journalized and the time it is posted, depending on the transactions posted in the interim and the costing method in use.

In conjunction with the journals, the General Ledger Distributions report should be used as a primary audit trail for Inventory Control. If transaction detail is kept, the Transaction Detail report can also be used.

Cost/Quantity Updating in Inventory Control

If the Purchase Orders and Accounts Payable applications are part of your system along with Inventory Control, you must specify which application(s) will update product costs and quantities at the time that you set up Inventory Control. These choices are available:

  1. Update product costs through Accounts Payable invoice postings and quantities received through Inventory Control receipt entries
  2. Update costs and quantities received through Purchase Orders invoice postings and receipt entries, respectively
  3. Update product costs and quantities received through Inventory Control receipts entries

You should select the updating applications based on timing considerations and to avoid duplication of effort. The following restriction applies:

If Accounts Payable is not part of the system, you must update costs and quantities through Inventory Control. This is because the Accounts Payable invoicing function is not available to update costs from either Accounts Payable or Purchase Orders.

If Accounts Payable is part of the system and Purchase Orders is not, you will probably want to update costs from Accounts Payable. This is because the invoicing function computes cost based on the values entered for purchase price, freight, tax, "other," and (optionally) discount. If you update costs from Inventory Control, you must compute the cost manually and then enter this value.

If Purchase Orders is part of the system, you will probably want to update costs and quantities through Purchase Orders. Invoicing in Purchase Orders supplies the cost figure. In addition, updating quantities (that is, entering receipts) in Purchase Orders updates the receipted values in the Purchase Orders file. If you choose to enter receipts through Inventory Control, the Purchase Orders file is not updated.

LIFO Implementation

When you set up Inventory Control, you must specify the inventory costing method (FIFO, LIFO, average cost, last cost, or standard cost) that will be used. LIFO has been designed to facilitate a periodic implementation. If LIFO is used, the application will use "last cost" to approximate the LIFO cost of inventory movements on a daily basis. At year-end, or on a periodic basis, the LIFO costing approximation must be adjusted to reflect costing based on an actual periodic LIFO computation. The adjustment is not automatic. You must calculate the difference between the inventory value based on a periodic LIFO computation and the inventory value based on the last cost approximation. You must then enter an adjustment to your inventory and cost of goods sold accounts.

To help in this calculation, the LIFO/FIFO Purchases Detail report provides a listing of all products purchased, along with associated quantities, costs, and dates of purchase. The monthly Transaction Detail report provides data regarding the last cost approximations that the system applied to all inventory movements during the period.

Estimated Freight Option

The estimated freight option is intended for users who receive vendor invoices without freight charges and then receive freight invoices at a later date. To use this option, product costs must be updated through either Accounts Payable or Purchase Orders. (See the section on Cost/Quantity Updating in Inventory Control.)

When an invoice is posted through Accounts Payable or Purchase Orders for a product with an estimated freight percentage, the system increases the cost of the product by the estimated freight percentage before it updates costs. In General Ledger, the Inventory account is debited for the cost of the invoice plus the estimated freight. The liability account is credited for the cost of the inventory, and a credit entry is made to the Estimated Freight account identified on the Product Classes record.

General Ledger and Inventory Control records reflect an estimate of freight costs, based on a percentage of the product cost. When actual freight charges are received, adjustments must be posted. When the freight invoice is received, the freight amount must be entered as a separate invoice. If the estimated freight percentage on the Products by Warehouse record is accurate, the amounts posted to Inventory Control do not require adjustment. If General Ledger is part of the system, an entry is required to back out the duplicate estimated freight. If the estimated freight percentage was not accurate, Inventory Control and General Ledger adjustments are required.

Unit Types

The Inventory Control application maintains three unit types:

  1. Pricing units. These are the units in which the vendor quotes prices. Pricing units are defined in the Products by Vendor file. All quantities in the Products by Vendor file are maintained in terms of pricing units.
  2. Purchasing units. These are the units in which orders are placed. Purchasing units are defined in the Products by Vendor file.
  3. Stockkeeping units. These are the units in which inventory is maintained. All quantities in the Products by Warehouse file are maintained in stockkeeping units.

The system uses two factors, the pricing factor and the quantity factor, to convert from purchasing units to pricing units and stockkeeping units, respectively. These factors are maintained in the Products by Vendor file. The following formulas are used for conversions:

Purchasing Units x Pricing Factor = Pricing Units

Purchasing Units x Qty Factor = Stockkeeping Units

Purchase receipts are entered in purchasing units. The following are entered in stockkeeping units:

  • Physical inventory
  • Material requisitions
  • Product and warehouse transfers
  • Adjustments
  • Receipts of warehouse transfers and manufactured goods

When reorder records are created, they include a reorder quantity that is expressed in stockkeeping units. If reorder records are converted to purchase orders, the reorder quantity is converted to purchasing units for the generated purchase orders. The quantity ordered on the purchase order is denominated in pricing units for the extension. All units and conversion factors are included on the reorder record.

LIFO/FIFO Costing

The product purchases history maintained by the Inventory Control application is not segregated by warehouse.

When the application operates under a FIFO costing method, the cost of an item removed from inventory is based upon the purchase history of the product within the company, and not confined to the purchase history of the individual warehouse.