The danger of setting up an item with an incorrect Standard Cost in Business Central

If you use the Standard costing method for your inventory in #businesscentral, you must ensure that the Standard Cost field has a value before receiving that item in your warehouse. Failing to do so will result in incorrect posting on both the purchase and sales transactions. Also, you will have a hard time reconciling your inventory value.

In this article, I will show what happens in Business Central if you receive and sell items with a Standard Cost of 0, how to fix the incorrect entries and how to prevent users from posting transactions if the item's Standard Cost is set up to 0.

What happens if you have expected cost posting enabled

Expected cost posting is a feature that allows you to record inventory value in an interim account when you receive goods for which you will be invoiced later. With a Standard costing method, your inventory will be valued at the same cost regardless of the price you pay for it. Any difference between the standard and purchase costs will be posted in a Purchase Variance account. More details here Design Details - Variance - Business Central | Microsoft Docs

If you have expected cost posting enabled, Business Central will post entries in your general ledger when you receive goods. The entries generated from a receipt of goods are the following:

Dr - Inventory Interim

Cr - Goods Received Non-Invoiced

Below is an example of the G/L entries resulting from the posting of a purchase receipt

Note that the item received has a standard cost of £20.00 while the Purchase Order is for £40.00

Nothing unusual so far. If the item is shipped and invoiced, the COGS will be £20.00. If the item is sold before the purchase invoice is posted, Business Central will move Inventory and COGS based on the expected cost.

When we post the purchase invoice, the purchase variance is calculated, and all the interim entries are reversed.

Let's see the entries one by one:

Note that if you don't have expected cost posting and record inventory value on the purchase invoice, you will not have the interim accounts entries.

Likewise, no reversal entries will be posted. Overall, the concept is the same because all the entries will be posted when you run the Post Inventory Cost to G/L.

But what if we forget to put a Standard Cost on the item card and receive it? This is where the problems begin:

0 inventory value = No G/L entries on receipt even if Expected Cost Posting is enabled

If the item has a Standard cost of £0.00, Business Central will not generate any G/L entries on the receipt of the goods. This happens because General Ledger entries with 0 value are not supported.

Here I have a purchase order with an item setup with a standard cost of 0.

As a result, the receipt does not move any balance in the inventory interim account even if the expected cost posting is enabled. So far, the issue is not critical. When the purchase invoice is received, it will post an inventory variance. After that, you can evaluate the item using an Item revaluation journal.

The problem becomes more serious if you sell the item before receiving the purchase invoice. Here's why:

...0 inventory value = No G/L entries on shipment and sales invoice

When our item with no standard cost is shipped to a customer and invoiced, the absence of an inventory value results in no G/L entries being posted. This is what happens in Business Central when you ship goods when Expected Cost posting is enabled:

Cr - Inventory

Dr - COGS (Interim)

Since the inventory value of the item received is 0, there are no G/L entries created to credit the inventory account. Therefore COGS interim will not be debited. In addition to having incorrect numbers in your chart of accounts, your profitability report based on items or customers will return inaccurate data.

But what if you revaluate your inventory after receiving a purchase invoice? Unfortunately, an item revaluation will solve only half of the problem:

Inventory revaluation will fix incorrect data. But...

An item revaluation after posting the purchase invoice will solve the purchase side of the transaction only. Let's see what happens to the purchase invoice posted for our item:

We posted a purchase invoice with a price of £40.00 resulted in a 100% variance in my inventory account, which is net at 0

We can now fix our inventory with a revaluation journal. The revaluation works on the receipt line of an item, and it will use the item application table to determine which entries to revaluate. In addition to existing inventory, the revaluation will look at items sold and update the COGS if part of that receipt has been shipped.

But, wait. There was no Inventory to COGS entries when we posted the sales invoice! Remember, when we invoiced the order, our item had a standard cost of 0. Therefore the entries do not exist. The only entries posted were Income, AR and VAT.

If the Inventory - COGS entries do not exist, the item revaluation journal will post those entries so your accounts will be balanced. The problem is about posting dates:

The revaluation of the sales transaction will be posted on the same date as the sales invoice.

The revaluation of an item with a 0 standard cost must write new G/L entries on both the receipt and the sales transactions. The problem is that the revaluation will carry the posting date of the journal - Therefore, the receipt - while the sales transaction will be updated with the date of the sales invoice.

In the picture above, you can see that the revaluation of my purchase posted at £0 revalued the receipt by £20.00, carrying the posting date of the receipt. But, the journal also created two additional entries to revaluate the sales side, and the entries are posted with the date of the sales invoice.

Now, if we look at invoice No. 103239, we can see the additional entries generated by the revaluation journal.

In my example, I have a receipt in March and the sales in April. If it was the opposite, i.e. I revaluate a receipt in April, but the sales happen in March, and the finance team had already closed the month, the journal will either not post or post and move balances in a closed month.

How to fix revaluation entries across different months

The only option to fix revaluations that move balances across months is to allow certain users to post in "closed" months and use general journals to net off the evaluation with a general journal so that the balance of inventory and COGS can match the month-end figures.

Unfortunately, Business Central gives no option to post the revaluation of sold inventory with the revaluation date. The posting date of any revaluation entry for Inventory- COGS must match the posting date of the sales transaction.

How to prevent users from receiving items with a standard cost equal to 0

One way to prevent users from posting entries is to use approval workflows on purchase documents. This is how I set up my workflow:

First, I create an approval workflow on purchase documents. The conditions are that the approval should start on orders and invoices if a purchase line of type item has the unit cost field with a value of 0

Once the workflow is enabled, purchase documents containing items with a standard cost equal to 0 cannot be received unless the user approves the document.

Ideally, the approver of this workflow should be a user with product management responsibilities. The user will receive the approval request, update the item standard cost and approve the request.

Though the process is still subject to user error - users can approve the order and forget to update the standard cost - the approval workflow can reduce the risk of receiving items with a standard cost of 0. For a more robust solution, I suggest creating an extension that will block users from posting purchase receipts if the standard cost of an item is equal to 0.

Conclusion

Setting an item with a standard costing method requires tight control of the item setup before posting purchase and sales transactions. Receiving and selling items with a standard cost of 0 will result in missing entries that can only be fixed through revaluation and G/L journals.

You can consider approval workflows or bespoke development to reduce the risk of posting transactions for items standard cost equal to 0.

Are you a consultant with a better idea of reducing the risk of posting entries with missing standard costs? Maybe you are a developer who can write the code for the extension? Let me know in the comments below.

This article was first published on June the 20th 2022.

Link here The danger of setting up an item with an incorrect Standard Cost in Business Central | LinkedIn