Add option to allow receipt of invoice to adjust cost of inventory item and COGS, even when after the fact.
by: Larry E. | over a year ago | Sales & Distribution
Votes
87
Add option to allow receipt of invoice to adjust cost of inventory item and COGS.
by: Larry E. | over a year ago | Sales & Distribution
Comments
This would be huge for distributors, one of the target markets for MAS90.
Many now do not rely on inventory as they would like to just because this feature is missing. Currently they can choose either accurate costs or accuate quanties, but not both. Companies for whom pricing changes frequently often wait for the invoice to update the reciept of inventory so their costs are correct, but quanities are then lagging and unreliable. This unreliability of quantities then leads to a general distrust of the system, so it doesn't ever get used nearly to the extent it could. Companies for whom quantities are most important will update reciept of goods immediately, but after being blind sided by incorrect costs a few times, staff will loose faith in the costing in MAS90 and develop their own system outside MAS90.
It's easy for us to tell them that stict control of PO authorizations would eliminate the erros or lag in pricing, but that is often not possible or practical in the real world.
I don't know if this will be helpful or not, but as an MD we have looked into this before and learned a lot about this function of MAS. The theory behind the current functioning of the software is that the purchasing staff will usually be accurate in creation of PO's with correct costs. Getting the items into inventory as quickly as possible upon receipt is paramount so your sales team will have visibility of products available for sale. The Price Variance amounts are the "price you pay" for getting inventory available to sell quickly. When you get the invoice three to ten days later, or as much as 30 days later, half or all of that inventory may be sold by then. So the system would have to then either only recost those items that are left on hand (assuming it can even tell how many of what are currently on hand came from that mis-priced PO) and then there's still a variance amount to be handled for the remaining units. You can't go back and re-cost what has already been sold and updated in the system, as financial postings have been made based on that cost, these could have been received and/or sold in a prior period with financials already closed and issued, commissions could have already been paid, reports already printed, etc. It would wreak havoc on your data to have historical transaction costs being changed by the system later on.
So while this seems like a great idea in theory, in practical application of trying to put together reasonable business rules in the software to do something like this, thats where it all breaks down. When we looked at writing an enhancement to address this for a client, thats when we realized how the current design actually makes a lot more sense than anyone ever gave it credit for. Coming up with the business rules for allocating it back is extremely difficult.
As we analyzed the need for that client, and most all of the others who have asked us about this or complained that it doesn't do it, we were able to hone in on the problem really being a staffing issue. If we can't get accurate costing on the PO's when they are created, then we end up with "garbage in/garbage out". And if a company has to wait until the invoice comes in before they receive inventory, they are allowing the failure of purchasing to do their job to significantly impact the entire business adversely. Sure there are exception situations, but virtually every time we run into this question, the problem is caused by a lack of controls and accountability in purchasing. Even with frequent cost changes, when a PO is issued and accepted, a contract takes place to purchase items or services at a listed price. The purchasing staff have to make sure that price is accurate.
Interesting point Jeff. I agree with you for the most part, except it won't be so accurate for international trade companies.
It's not always that straight forward when currency exchange is involved. Getting the accurate cost that involves foreign currency is at mercy of correct financial decision and timing. Most institutions offer better rate for a large forward currency contract. But we sometimes see a clear trend and market consensus in the currency market, and we just don't want to buy the future now. Or maybe we don't have enough cash to put a contract, but expecting enough inflow in 30 days.
What I would like to see is....MAS taking more detailed history record so that it would be able to calculate the quantity necessary to adjust the current inventory to reflect the correct inventory value, AND take care of PO Variances and Currency Loss/Profit. What's sold already is in the history, yes, you are right, but at least MAS should take care of what has not been done yet.
It's not impossible to write a logic to figure out the quantity if the logic takes parameters from settings. It's just more involving. Heck, I wouldn't mind if the process requires some user interactions in GUI, as long as MAS does the heavy load like making a list of items with receipt of goods cost and invoiced cost, rough quantity to be adjusted, and a few checkers or entry field for user to be able to tweak or finalize the adjustment.
At the very least, the item's last cost could be updated when the receipt of invoice occurs. This way the next time a purchase order is created the cost would be updated.
This not only fluctuates with currency, but also with specific commodity markets such as metal. We buy/sell Aluminum and Copper which have fluctuating prices daily. If we make a PO for $1.50 per unit (pound), the inventory is put in at $1.50 per pound. Once the invoice comes, there will always be a difference in price compared to the PO unit price. Say we bought 40,000 pounds and the invoice comes in at $1.25. This $10,000 false immediate gain then gets dumped into the PO variance account, which falsely improves or hurts the current month. This also deflates the actual profit margin for the sale of the goods this raw material went into.