The _____ inventory method assumes that the units in ending inventory were the items acquired first.

6 Min. Read

March 28, 2019

Inventory valuation is the monetary amount associated with the goods in the inventory at the end of an accounting period. The valuation is based on the costs incurred to acquire the inventory and get it ready for sale.

Inventories are the largest current business assets. Inventory valuation allows you to evaluate your Cost of Goods Sold (COGS) and, ultimately, your profitability. The most widely used methods for valuation are FIFO (first-in, first-out), LIFO (last-in, first-out) and WAC (weighted average cost).

What this article covers:

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

What Are the Objectives of Inventory Valuation?

Inventory refers to the goods meant for sale or unsold goods. In manufacturing, it includes raw materials, semi-finished and finished goods. Inventory valuation is done at the end of every financial year to calculate the cost of goods sold and the cost of the unsold inventory.

This is crucial as the excess or shortage of inventory affects the production and profitability of a business.

Determine the Gross Income

Inventory is used to find the gross profit, which is the excess of sales over cost of goods sold. To determine the gross profit or the trading profit, the cost of goods sold is matched with the revenue of the accounting period.

Cost of goods sold = Opening stock + Purchases – Closing stock

The above equation shows that the inventory value affects the cost and thereby the gross profit. For example, if the closing stock is overvalued, it will inflate the current year’s profit and reduce profits for subsequent years.

Ascertain the Financial Position

Closing stock is shown as a current asset. The value of the closing stock on the Balance Sheet determines the financial position of the business. Overvaluation or undervaluation can give a misleading picture of the working capital position and the overall financial position.

How Inventory Is Valued

The method for valuing inventory depends on how the stock is tracked by the business over time. A business must value inventory at cost. Since inventory is constantly being sold and restocked and its price is continually changing, the business must make a cost flow assumption that it will use frequently.

There are four accepted methods of inventory valuation.

• Specific Identification
• First-In, First-Out (FIFO)
• Last-In, First-Out (LIFO)
• Weighted Average Cost

Specific Identification

Under this method, every item in your inventory is tracked from the time it is stocked to when it is sold. It is usually used for large items that can be easily identified and have widely different features and costs associated with these features.

The primary requirement of this method is that you should be able to track every item individually with RFID tag, stamped receipt date or a serial number.

While this method introduces a high degree of accuracy to the valuation of inventory, it is restricted to valuing rare, high-value items for which such differentiation is needed.

First-In, First-Out (FIFO)

This method is based on the premise that the first inventory purchased is the first to be sold. The remaining assets in inventory are matched to the assets that are most recently purchased or produced.

It is one of the most common methods of inventory valuation used by businesses as it is simple and easy to understand. During inflation, the FIFO method yields a higher value of the ending inventory, lower cost of goods sold, and a higher gross profit.

Unfortunately, the FIFO model fails to present an accurate depiction of the costs when there is a rapid hike in prices. Also, unlike the LIFO method, it does not offer any tax advantages.

Last-In, First-Out (LIFO)

Under this inventory valuation method, the assumption is that the newer inventory is sold first while the older inventory remains in stock. This method is hardly used by businesses since the older inventories are rarely sold and gradually lose their value. This results in significant loss to the business.

The only reason to use LIFO is when businesses expect the inventory cost to increase over time and lead to a price inflation. By moving high-cost inventories to cost of goods sold, the reported profit levels businesses can be lowered. This allows businesses to pay less tax.

Weighted Average Cost

Under the weighted average cost method, the weighted average is used to determine the amount that goes into the cost of goods sold and inventory. Weighted average cost per unit is calculated as follows:

Weighted Average Cost Per Unit = Total Cost of Goods in Inventory / Total Units in Inventory

This method is commonly used to determine a cost for units that are indistinguishable from one another and it is difficult to track the individual costs.

Which Inventory Valuation Method Is Best

Choosing the right inventory valuation method is important as it has a direct impact on the business’s profit margin. Your choice can lead to drastic differences in the cost of goods sold, net income and ending inventory.

There are advantages and disadvantages of each method. For example, the LIFO method will give you the lowest profit because the last inventory items bought are usually the most expensive while the FIFO will give you the highest profit as the first items in stock are usually the cheapest.

To assess the method which is best for you, you need to pay attention to changes in the inventory costs.

• If the inventory costs are escalating or are likely to increase, LIFO costing may be better. As higher cost items are considered sold, it results in higher costs and lower profits.
• In case your inventory costs are falling, FIFO might be the best option for you.
• For a more accurate cost, use the FIFO method of inventory valuation as it assumes the older items that are less costly are the ones sold first.

As a business owner, you need to analyze each method and apply the method that reflects the periodic income accurately and suits your specific business situation. The Financial Accounting Standards Board (FASB), in its Generally Accepted Accounting Procedures, allows both FIFO and LIFO accounting.

It is also important to note businesses cannot switch from one method of inventory valuation to another. If your business decides to change to LIFO accounting from FIFO accounting, you must file Form 970 with the IRS.

RELATED ARTICLES

The inventory costing method you choose defines the way NetSuite calculates the cost of items. For example, how inventory costing calculations are handled for costs associated with buying the same item at different purchase prices over a certain period.

NetSuite provides the following inventory costing methods:

• First-In, First-Out (FIFO) – The first goods purchased are assumed to be the first goods sold. Therefore, the ending inventory consists of the most recently purchased goods. This method is useful to track different shipments of similar products.

• Last-In, First-Out (LIFO) – The last goods purchased are assumed to be the first goods sold. Therefore, the ending inventory consists of the first goods purchased.

• Average – Costing is calculated as the total units available during a specific date range. The units are then divided by the beginning inventory cost plus the cost of additions to inventory. Average is the moving average method.

• Standard – This costing lets you track standard costs for items and to track variances between these expected costs and actual costs. For more information, see Standard Costing.

• Group Average – This costing lets you track one average cost for an item across multiple locations within a defined group. For more information, see Group Average Costing.

• Lot Numbered – Lot items track the purchase, stock, and sale of a group or quantity of items. It assigns a specific number to the group or quantity. For more information, see Lot Numbered Items.

In NetSuite, average costing is the default inventory costing method. If inventory levels are negative, NetSuite uses the last purchase price as the inventory costing method.

The item cost calculated by each costing method vary as shown in the following example. Monday, you buy 20 calculators at $10 each and place them in inventory. Tuesday, you buy 20 calculators at $15 each and place them in inventory. Wednesday, you sell 5 calculators to a customer. The recorded cost of the calculators is calculated based on the costing method as follows:

Using any costing method, the cost for items is calculated based on the cost shown on the transaction that brings the item into inventory.

For example, you use Advanced Receiving and the workflow Purchase Order > Item Receipt > Vendor Bill. The item cost NetSuite uses is the cost shown on the item receipt.

The time of costing is affected if you change the cost used for an item. For example, you enter an item receipt showing one cost. Later, the bill from the vendor shows another cost. If you change the cost on the vendor bill, item costing is not updated. The costing sources the receipt that brought the items into inventory. Therefore, you must update the cost that appears on the item receipt to update the item costing.

Any variance between the receipt and the bill appears in the Accrued Purchases account. If there are closed periods between the original receipt with the incorrect rate and the current date, an inventory adjustment is required. Use an inventory adjustment worksheet in the current period, and post to the adjustment account Accrued Purchases. If you choose to reopen the old periods and edit the receipt to match the bill, it does affect your past financials. It may cause a recalculation of inventory costs from that point forward.

General Notices

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You can select the type of inventory costing method your business uses. The cost of your inventory is made up by your items' purchase prices and all costs incurred in acquiring these items. The costing method you choose determines how you handle the costs associated with buying the same items at different purchase prices over a certain period. For more information about costing methods, see Costing Methods.

The costing method selected in Accounting Preferences is the default method used to track the cost of your items. When you create a new item, you can accept this default costing method. You can also select a different costing method on the Basic subtab of the item record.

In NetSuite, average costing is the initial default costing method. Only someone with permission to access the Accounting Preferences page can change your default inventory costing method.

When inventory costs incur depends on whether you use the Advanced Receiving feature.

To enable the Advanced Receiving feature:

1. Go to Setup > Company > Setup Tasks > Enable Features..

2. On the Transactions subtab, check the Advanced Receiving box.

3. Click Save.

   If you use Advanced Receiving, costing occurs when you receive items and generate item receipts.

   If you do not use Advanced Receiving, costing occurs at the time of bill entry.

To select a default inventory costing method:

1. Go to Setup > Accounting > Preferences > Accounting Preferences.

2. Click the Items/Transactions subtab.

3. In the Default Inventory Costing Method field, select the method your company uses.

4. Click Save.

The Costing Method field on item records shows your selection by default. You can still select another method when creating an item record, if needed.

NetSuite tracks and reports on your inventory based on the costing method selected for items. If a different costing method is needed, an administrator can set your inventory costing method. For more information, see Changing Your Costing Method.

The item cost affects your asset account and Cost of Goods Sold (COGS) account each time you receive or fulfill the item.

For items in your inventory, you can select the COGS account that costs post to on posting transactions.

Inventory Reporting After Changing the Costing Method

General Notices

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If you have inventory and you want change your costing method, you cannot automatically apply LIFO or FIFO costing to your current inventory.

To change your costing method:

1. Manually close each existing inventory item by adjusting its inventory to zero.

2. Inactivate the item record.

3. Recreate the item record with the appropriate opening balance.

   All new inventory items you create automatically use your new costing method.

General Notices

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You can select the type of inventory costing method your business uses. The cost of your inventory is made up by your items' purchase prices and all costs incurred in acquiring these items. The costing method you choose determines how you handle the costs associated with buying the same items at different purchase prices over a certain period. Your inventory reports reflect the costing method you choose. Average costing is the default costing method.

When inventory costs incur depends on whether you use the Advanced Receiving feature. For a procedure to enable this feature, see Setting a Default Inventory Costing Method.

• Costing occurs at time of bill entry

• Inventory costing is determined by amounts entered on bills for inventory items

• No inventory costing exists before a bill is entered

• If a purchase order is still open when a period closes, you can choose to:

  • Reopen the period and change the purchase order amounts so they tie to the bill

  • Leave the discrepancy because it has no impact on accounting

• Transactions that might affect inventory costing:

  • Create Invoices

  • Enter Cash Sale

  • Write Checks

  • Use Credit Cards

  • Enter Bills

  • Issue Credit Memo and Refund Cash Sales

    • affects inventory costing the same way a purchase does

    • most recent value used for LIFO

    • oldest value used for FIFO

    • quantities returned are added back to inventory available for sale

  • Enter Vendor Credits

    • most recent value used for LIFO

    • oldest value used for FIFO

    • quantities credited decrease the quantity of inventory available for sales

  • Adjust Inventory

    • affects inventory costing the same way purchases and sales do

    • most recent value used for LIFO

    • oldest value used for FIFO

    • quantity increases add inventory available for sale

    • quantity decreases lower inventory available for sale

• Costing occurs at time of item receipt

• Inventory costing is determined by the amounts entered on purchase orders, however, are dated by the item receipts

• No inventory costing exists before there is an item receipt

• If a purchase order is still open when a period closes, you can choose to:

  • Reopen the period, delete the item receipt, change the purchase order amounts so they tie to the bill, and then recreate the item receipt

  • Create a journal entry to post the inventory costing variance in the new period

  • Enter the bill with variances and accept reporting discrepancies

    For example, if the bill price is higher than the purchase order price, inventory costing will be understated.

• Transactions that might affect inventory costing:

  • Create Invoice

  • Enter Cash Sale

  • Write Checks

  • Use Credit Cards

  • Enter Purchase Orders – this determines the inventory costing cost

  • Item Receipt – this determines the inventory costing date

  • Issue Credit Memo and Refund Cash Sale

    • affects inventory costing the same way a purchase order does

    • most recent value used for LIFO

    • oldest value used for FIFO

    • quantities returned are added to inventory available for sale

  • Enter Vendor Credits:

    • most recent value used for LIFO

    • oldest value used for FIFO

    • quantities credited decrease the inventory available for sale

  • Adjust Inventory

  • affects inventory costing the way purchases and sales do

  • most recent value used for LIFO

  • oldest value used for FIFO

  • quantity increases add inventory available for sale

  • quantity decreases lower inventory available for sale

Changing Your Costing Method Costing Methods

General Notices

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When transactions post a Cost of Goods Sold (COGS) amount to the general ledger, the cost posts to the default Cost of Goods Sold account. This COGS account helps you track your total expenditures on items you sell.

You can choose a default COGS account for Inventory, Non-Inventory, Service, and Other Charge Items.

To select a default COGS account:

1. Go to Setup > Accounting > Preferences > Accounting Preferences..

2. In the Default COGS Account field, select a COGS account.

3. Click Save.

Employees with permission can change the account on individual item records.

You can view the amounts that post to the default COGS account in the cost of goods register.

General Notices

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After an assembly item has been built, it is treated like an inventory item for costing purposes. The asset, or inventory costing value, of each built assembly item is the total value of the assembly's member items.

These values act like the assembly item's purchase price for inventory costing calculations. Inventory costing is tracked for the assembly item based on the inventory costing method selected on the item record. For more information about assemblies and component costing, see System Cost of Goods Sold Adjustments.

When the cost of a serialized component of an assembly is unknown, NetSuite calculates the cost as follows. NetSuite uses the historical average cost for the component item when they are unbuilt and returned to stock. The sum of the cost of unbuilt items might not match the total purchase cost of the assembly made up of those items.

For example, you have a serialized assembly in stock that costs $12. It is composed of a single serialized component and has a current historical average cost of $15. When you unbuild the assembly, the accounting posts as follows:

• Asset account of assembly: -$15

• Asset account of component: +$15

• Asset account of assembly: +$3

• COGS account of assembly: -$3

You now have the component in stock at a value of $15. The $3 difference between the assembly value and the unbuilt component value is pulled out of the COGS account of the assembly. It then posts back to its asset account. The total amount reduced from the assembly's asset account to create the component is $12, or the value of the assembly.

General Notices

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NetSuite tracks inventory costing differently if you use or do not use the Advanced Receiving feature.

If you use Advanced Receiving, LIFO/FIFO costing occurs at the time of item receipt. Inventory costing is determined by the amounts entered on purchase orders.

The following transactions may affect inventory costing:

• Create Invoice

• Enter Cash Sale

• Write Checks

• Use Credit Cards

• Enter Purchase Orders (determines inventory cost)

• Item Receipt (determines inventory costing date)

• Issue Credit Memo and Refund Cash Sale

  • affects inventory costing the same way an item receipt does

  • most recent value used for LIFO

  • oldest value used for FIFO

• Enter Vendor Credits

  • most recent value used for LIFO

  • oldest value used for FIFO

• Adjust Inventory

  • affect inventory costing the way purchases and sales do

  • most recent value used for LIFO

  • oldest value used for FIFO

If you do not use Advanced Receiving, inventory costing occurs at time of bill entry. Inventory cost is determined by amounts entered on bills for inventory items. Inventory costing cannot be tracked or calculated until a bill is entered.

The following transactions may affect inventory costing:

• Create Invoices

• Enter Cash Sale

• Write Checks

• Use Credit Cards

• Enter Bills

• Issue Credit Memo and Refund Cash Sales

  • affects inventory costing the same way a purchase does

  • most recent value used for LIFO

  • oldest value used for FIFO

• Enter Vendor Credits

  • most recent value used for LIFO

  • oldest value used for FIFO

• Adjust Inventory

  • affects inventory costing the same way purchases and sales do

  • most recent value used for LIFO

  • oldest value used for FIFO

General Notices

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When an in stock item is sold, NetSuite reduces the total in the inventory asset account, and increases the total in the COGS account. When an item is sold that is not in stock, NetSuite makes an adjustment to the on-hand value of the item. This adjustment is called a system COGS adjustment. A system COGS adjustment could show in financial reports or on transactions.

System COGS adjustments are a necessary procedure for tracking inventory costing used by many accounting systems. When an item is not in stock, NetSuite estimates the cost of goods sold based on historical data. Only if no historical data exists, the estimated cost of goods sold is based on the cost entered.

When the item is later added to your inventory again, a linked COGS adjustment entry is also created. This COGS adjustment is triggered by any transaction that creates a positive inventory level from a negative one, including the ones listed below:

• Vendor Bill

• Purchase Order Receipt

• Assembly Unbuild

• Inventory Adjustment

This COGS adjustment changes only the on-hand value in an amount that is calculated as follows:

• [the estimated COGS (when you were out of stock)] - (the cost of the item when you added it back to stock)

Below are example posting asset lines on item receipts and fulfillments.

For transactions that trigger an inventory adjustment, NetSuite considers all positive adjustments first and all negative adjustments last.

For example, you enter an invoice that includes Item A at 6:00 am. You enter a vendor bill for Item A at 7:00 am, both on the same day. After you save the vendor bill, NetSuite recalculates the item cost for the invoice as if the vendor bill had been entered before the invoice. The vendor bill added the item to the inventory, therefore was considered ahead of the invoice, which removed the item from inventory.

When transactions are entered on the same date, they are considered by transaction type in the following order:

1. Inventory adjustment worksheets (First-in-day)

2. Purchase transactions (purchase receipts, vendor bills, adjustments)

3. Assembly builds, component builds, transfers and transfer orders (including fulfillments and receipts)

4. Vendor return fulfillments, assembly unbuilds

5. Sale transactions (sales order fulfillments, invoices, cash sales, and inventory adjustments)

6. Return transactions (credit memos and RMA receipts)

7. Inventory adjustment worksheets (Last-in-day)

For vendor returns, differences between the vendor return authorization return cost, and the average cost of the item posts as a COGS adjustment.

General Notices

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You can use NetSuite reports to determine what has caused an inventory costing problem.

Inventory Valuation - This report lists the on-hand quantity and total value of each inventory item.

To view the item Inventory Evaluation report:

1. Go to Reports > Inventory/Items > Inventory Valuation..

2. To identify a problem transaction and correct it, click the on-hand quantity.

3. On the Detail page, select a date range to display costing calculations for transactions during that period.

   For example, an inventory adjustment might be recorded with zero cost. Because the item cost is not entered, profitability calculations are not correct. You can use this report to identify the problem.

Cost of Goods Sold Register - A Cost of Goods Sold (COGS) account register lists item costs posted by transactions you enter. Each cost that posts is an expense incurred for purchasing the items you sell. You can use the COGS account register to find transactions that affect your COGS account. For example, if you know the date of an incorrect COGS posting, you can open the COGS register to find the transaction.

To see the COGS register:

1. Go to Lists > Accounting > Accounts.

2. In the Account column, click name of the COGS account you want to see.

   The report may take a few minutes to load.

General Notices

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Inventory costing recalculations are an adjustment. The adjustment corrects inventory costing values when transactions are inserted into or removed from an existing series of transactions.

When you enter a series of purchases, sales or adjustments for a particular item over time, you have a specific costing history for that item. The inventory costing values need to be recalculated each time there is a change to the costing history of a particular item.

For example, you receive an order of widgets into inventory. The cost of each widget in that shipment affects the costs that show when you sell widgets after the receipt date. You might encounter this scenario:

• January: Receive 100 widgets at a cost of $10.00.

• January: Sell 10 of those widgets.

  You now have 90 of the $10 cost items remaining in stock.

• March: Receive 100 more of the same widget, now priced at $12.

The average cost of the widgets is calculated from the date of receipt forward. If you insert a sales transaction dated prior to the March receipt, the item on that transaction uses the $10 average cost. Any sales entered with a date after the March receipt uses the $12 average cost.

Item records can show the status of cost accounting calculations. For more information, see Cost Accounting Status on Item Records.

The following examples use Average Costing.

The first table shows purchase and sale transactions existing for an item on 7-1-2021:

The second table shows a sales transaction dated 6-10-2021 that is entered on 7-1-2021:

The final table shows how the inserted sales transaction affects the cost recorded for the item:

General Notices

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When you enter an inventory adjustment or inventory adjustment worksheet and use the current date, then there is no need to recalculate inventory costing. However, if you back-date the adjustment, inventory costing recalculations are likely to be required.

• A back-dated inventory adjustment worksheet recalculates inventory costing on all items.

• A back-dated inventory adjustment recalculates inventory costing only for the items on the adjustment.

The amount of time it takes to complete the necessary costing recalculations depends on the amount of data affected by the change.

Typically, the calculations required to update the costing history for a particular item can be completed in a short period. Perhaps, as short as a few hours. This is true if you enter transactions on the same day that they occur. If you change information about a purchase at the beginning of the item's history, that change can affect the costing on all subsequent sales.

Lengthy recalculations are normally due to an edit to a transaction that occurred at some point early in the transaction history of an item. Length recalculations are also due to edits to edits to transaction history of many different items. In that case, the recalculation must go through all subsequent transactions for that item to evaluate what costing adjustments need to be made.

For example, you insert a transaction dated one year prior to the current date. Many transactions were entered between the date of the inserted transaction and the current date. These transactions require an inventory costing update. Another example, you changed a transaction from two years earlier but since then you entered only a few transactions with that item. In such a case, there is not a large quantity of data to be recalculated.

When you run a report, you could encounter a message regarding inventory costing calculations.

Changes to items on a transaction that have inventory impact and update costing history, the costing for those items might need to be recalculated. These calculations can run immediately or overnight.

While these calculations are being made, when you view a report that is affected by the calculations, a message appears on the report. The message indicates that the report values might change when the calculations are complete.

After the inventory costing recalculations complete, the message no longer appears when you view the report.

Select Display Title from report Options to read the messages.

If you open a previously closed accounting period and then edit an inventory transaction from that period, note the following. The costing changes you enter for items on the changed transaction propagate to all subsequent related transactions. Therefore, you must run a complete inventory costing recalculation.

When certain changes are made to a transaction, inventory costing is recalculated for items on the transaction. Transaction changes that do initiate an inventory costing recalculation include the following:

• changing an item

• changing the item quantity

• changing a unit price

• changing serial or lot numbers

• changing the date

• changing the order total

• changing the taxes charged

To limit the inventory costing triggers that occur, choose settings for the Create and Edit Inventory Transactions Dated in Closed Periods accounting preference.

This preference can prevent changes to transactions that would result in inventory costing calculations in closed periods.

• When the preference box is clear, it prevents changes to transactions that would result in inventory costing calculations in closed periods.

• When the box is checked, it allows some changes to transactions that would result in inventory costing calculations in closed periods. However, changes in some fields can trigger inventory costing calculations for an item even without posting to the general ledger. These changes can cause inventory costing errors and failures.

You should disable this preference.

An administrator can choose the setting for this preference. For more information, see General Accounting Preferences.

You can also manage settings for accounting periods. You can disallow some changes to posting transactions after the period has been locked to transactions.

The Allow Non-G/L Changes box is not available until after a period has been locked to transactions.

• When this box is checked, users with the Allow Non G/L Changes permission can make changes to posting transactions. This is true for transactions that do not affect the general ledger, and after the period has been locked to transactions. These changes can trigger inventory costing recalculations. Examples of fields that do not trigger inventory costing changes are: bin, class, department, and memo.

• When this box is clear, changes to posting transactions are prohibited after the period has been locked.

  Clearing this box can help prevent inventory costing problems by blocking closed period changes to fields on transactions that can impact costing. Examples of fields that do not affect the general ledger but can impact inventory costing are as follows:

  • Date

  • Period

  • Location

  • Item type

  • Item quantity

  • Item amount

  • Item unit of measure

  • Inventory lot or serial number

  Adding or removing transaction lines is also not permitted.

For more information about the Allow Non G/L Changes setting for periods, see Setting Up Single Accounting Periods.

Inventory Costing Recalculations

General Notices

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This section includes eight common scenarios related to inventory costing that can trigger a cost recalculation.

General Notices

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When you ship a sales order item when you do not have the item in stock it is known as an underwater sale. Inventory is in an underwater state when the on-hand quantity of the item is below zero. Whenever an item is shipped, even if it is underwater, an inventory costing calculation is initiated.

You should avoid entering or shipping an item if the on hand count is zero or a negative amount. If you enter sale transactions when an item is underwater, NetSuite cannot accurately calculate the cost of the item on those sale transactions. Cost calculations from underwater sales can lead to skewed results for reports and inventory data. For more information, see Avoiding Underwater Inventory.

General Notices

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If you do not enter a purchase price for an item and the item has never been received, this can cause unexpected inventory costing results. If you sell an item that shows a cost of zero before you receive it, the following complications can arise:

• a long costing run

• no cost specified for the item until the item cost is accurately recalculated based on a receipt or inventory adjustment cost

When you sell an item that has never been received, the cost of the item is calculated as zero. When the item is received, NetSuite creates a costing adjustment for the item. The adjustment is based on the item receipt, and the item fulfillment is updated with the new cost.

When a non-zero value is entered on the item receipt and it posts to the general ledger, a cost adjustment line accompanies the item receipt.

If the transaction date of the item receipt is in a closed period, the closed period needs to be re-opened.

• Enter a purchase price for your items. The purchase price you enter should be your best estimate of the price that will appear on the purchase order. For more information, see Entering Purchasing and Inventory Information on Items.

• Restrict fulfillment until the item is on hand or has been received. For the preference Fulfill Based on Commitment, select Limit to Committed. For more information, see Order Management Accounting Preferences.

• Use approval routing to require approval for purchases. Require a cost to be entered as part of the approval process. For more information, see Approval Routing.

• If you use the Warehouse Manager role, customize the role for the following: Rate access level is View only, Quantity access level is Edit. For more information, see NetSuite Roles Overview.

• Set item receipts to default to show the cost from the linked purchase order.

• Always receive the purchase order for an item before you ship or fulfill the item.

General Notices

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Backdating a transaction is entering a date that is prior to the current date. For example, today is July 1, 2021 and I enter an invoice with the date June 1, 2021. That invoice is backdated.

If you back date a transaction to a date within a closed period and then later reopen that closed period, a cost recalculation occurs.

If you back date a transaction to a date within a closed period, you must first open the closed period before saving the backdated transaction.

General Notices

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If you reopen a closed period to process a back dated transaction, leave the period open until the inventory cost recalculation completes.

• Avoid backdating transactions.

• Do not close an accounting period unless you are certain that the cost recalculation is complete. This includes the standard month-end closing. For more information, see Reopening a Closed Period.

To learn more, see

General Notices

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If a custom script is written to override a standard NetSuite function, the script can trigger a cost recalculation. This can cause errors for costing and general ledger postings for transactions associated with the custom script.

General Notices

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You enter an inventory adjustment worksheet that includes an adjustment for an item that uses on FIFO or LIFO costing. NetSuite recalculates costs for those items using average costing, not FIFO/LIFO.

For example, if you do not receive and build an item prior to fulfilment, the item can become underwater. You fulfill and invoice an item in January. You receive and build the item in February. Costs are understated for January, but overstated for February.

When the inventory level is negative, costs are understated because NetSuite estimates the cost based on the last transaction cost while above water. When inventory goes back above water, a cost adjustment accounts for the period of costing to bring inventory to an above water state. This results in NetSuite reports showing understated or overstated costs during these two periods.

When the cost is calculated using Average costing, the worksheet sells the items and then buys them back based on the cost input. When this happens, all FIFO/LIFO history is lost.

• Use the inventory adjustment worksheet only for items that do not use the FIFO or LIFO costing methods.

• Avoid using the inventory adjustment worksheet for an item that is underwater. In such a case, the worksheet is used to create links to the negative items. 

• Use the Inventory Count page for updating the physical count, rather than an inventory adjustment worksheet. You can also use an inventory adjustment.

For more information, see Inventory Adjustments.

General Notices

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When you revalue standard cost inventory and include a backdate, this triggers a cost recalculation that runs for an extended period. Note that costing calculations for assembly item components run slower for any transactions that include them, and all affected transactions must be re-calculated.

If a standard cost is changed for an item, all assemblies that include that item as a component must have costs recalculated. This includes any upper-level assemblies. Cost recalculations can take a long time if the component item is used across many sub-assemblies, and is deep in the Bill of Materials structure.

• When you revalue standard cost inventory with current or future dates, do not back date. 

• If an item is a component of an assembly, the revaluation will take longer than a non-component item. Consider this to provide enough time for your month-end close. 

• Consider a Cost of Goods Sold general ledger journal entry to make an adjustment instead of  revaluing standard cost inventory.

For more information, see Revalue Standard Cost Inventory.

General Notices

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If you return an item and create a standalone credit memo rather than a return authorization, the quantity is added back to inventory. However, the value of the item is not credited to the Cost of Goods Sold (COGS) account of the item. Issuing a standalone credit memo for a return can result in inaccurate costing for the item.

Always use the return authorization process to return items to inventory to maintain accurate costing. When you use the return authorization process, costing is sourced from the originating sales order or invoice. Then, creating the credit memo from the originating transaction retains the link for costing. For more information, see Vendor Return Authorization Overview.

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If you enter an item distribution and then backdate a transaction prior to the distribution, this can cause problems with inventory costing. It can also result in a negative on-hand count for the item in a null location. This is true especially for lot-numbered or serial-numbered inventory.

If you have problems with inventory due to backdating an item distribution, you should inactivate the item record and then create a new one. For more information, see Creating Item Records.

General Notices

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Inventory and assembly item records include a Cost Accounting Status field that identifies the state of Cost Accounting calculations for that item. For Multi-Location Inventory users, the status is identified per location.

The Cost Accounting Status indicated can be one of the following:

• In Queue – flagged for Cost Accounting but calculations are not running yet

• In Process – flagged for Cost Accounting and calculations are currently running

• Completed – not flagged for Cost Accounting and calculations are not running

• Error – Cost Accounting calculations failed

When a new transaction is entered that affects Cost Accounting for an item, note the following. The cost accounting status for the item is set to In Queue if the current cost accounting status is either Completed or Blank. If the item status is In Process or Error, the status is not reset.

The Cost Accounting Status indicated for serial or lot numbered items can be one of the following:

• Pending – flagged for Cost Accounting but calculations are not running yet

• Processing – flagged for Cost Accounting and calculations are currently running

• Complete – not flagged for Cost Accounting and calculations are not running

• Failed – Cost Accounting calculations failed

General Notices

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When an item is returned by a customer, NetSuite must account for that item in the books by assigning it a return cost. This can be done in one of two ways:

• Calculated Costing – If you use calculated costing, you allow NetSuite to calculate the return cost of the item. If you allow the return cost to be calculated, it might not be the same cost every time.

• Fixed Costing – If you use fixed costing, you assign a fixed return cost for an item. This cost is always used when the item is returned and overrides any calculated cost.

  You are able to set a default cost to be used for an item when it is returned. This provides an alternative method to relying on NetSuite calculations to set the return cost, which might be a varying amount.

Use one of the following methods to set a fixed return cost for an item:

• Fixed Return Cost on Item Records

• Customizing Return Receipts

Inventory item and assembly item records display the field Default Return Cost. In this field, enter the rate you want to default to show as the cost for this item when it is returned. What you enter defaults to appear in the Override Rate field on item receipts. You can change this value after it appears on the item receipt.

• If you use Multiple Units of Measure, this rate is always based on the stock unit.

• If you use Multi-Location Inventory, this field appears on the Inventory subtab of item records in the location list without being customized.

• If you do not use the Multi-Location Inventory feature, this field is hidden by default. You must customize the item record to display the field.

Return receipts forms can be customized to display the fields Override Rate and Override Rate Currency.

To customize return receipts:

1. Go to Customization > Forms > Transaction Forms.

2. Next to Item Receipt, click Customize.

3. In the Screen Fields subtab, click the Columns subtab.

4. Check the Override Rate box.

5. Click Save.

When you use the custom receipt page, it displays these fields:

• Override Rate – This field defaults to show the value entered on item records. If the item being returned has no value entered in this field, it appears blank. You can enter a values on an as-needed basis.

  If you use Multiple Units of Measure, the rate in this field is based on the units on the originating transaction.

• Override Rate Currency – The currency displayed in this field is always based on the base currency.

  This field shows only if you use the Multi-Currency feature.

If you use Multi-Location Inventory, when you select a location on the receipt, the rate and currency from the item record appear in these fields. For more information, see Returned-Item Costing Using Multi-Location Inventory.

If the Override Rate field is left blank on the item receipt, NetSuite calculates the cost of the returned item.

General Notices

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Group average costing lets you track one average cost for an item across multiple locations within a defined group.

Group average costing is available only when you have enabled the Multi-Location Inventory feature. Group average costing is available for inventory items and assembly items.

First, create a location costing group record to track the locations associated with that group. Then, assign one or more locations to a location costing group. For more information, see Creating a Location Costing Group.

Each time an inventory related transaction with costing impact is processed for a location costing group member, a group average cost is recalculated. The single average cost is calculated by dividing the total inventory value across locations by the total quantity across all locations. This calculated cost is synced within the group and is used in costing calculations for all locations.

Note that individual items are not assigned to a location costing group. Within a location, all inventory and assembly items assigned the Group Average costing method are included in the location costing group assigned to that location.

If an item is assigned the group average costing method, but its locations are not included in a costing group, note the following. For those locations, the item's costing method is Average because no grouping calculations are done for those locations.

One benefit of group average costing is costing for underwater fulfillments. For example, a cost posts for Location A in the group and that cost propagates to the Location B in the group. If an underwater fulfillment posts for Location B, an average cost can be assigned to the underwater fulfillment. For more information, see Avoiding Underwater Inventory.

Inventory Adjustment Worksheets are not available for items with a Group Average costing method.

The following applies to NetSuite OneWorld customers.

The locations in a location costing group can be associated with one or more subsidiaries. When using locations from different subsidiaries in the same location costing group:

• All subsidiaries in the same location costing group must have the same base currency.

• Note the following requirement for a subsidiary within a group using the Multi-Book Accounting and Multiple Currencies features. All subsidiaries in the group must have the same secondary books and identical currencies. This requirement is to calculate the group average cost across all subsidiaries in all currencies.

Note the following for customers using both the Multi-Location Inventory and Group Average Costing features. You can set an accounting preference to include the account values for group average cost items that are in transit between locations. This allows in-transit inventory accounts to be balanced during the bulk process.

This accounting preference helps produce more accurate costing calculations and financial statement reporting. It ensures that the group average cost reflects the assets of both on-hand and in-transit inventory accounts.

If you have the Set Up Accounting permission, you can set the Include In-Transit Value in Group Average Cost Calculations preference. For more information, see Items/Transactions Accounting Preferences.

When you use group average costing, the item cost is calculated based on costs across all locations in the group.

The preceding table describes sample data used in group average costing calculations for an item receipt.

1. Location Costing Group Total Quantity – Location costing group total on-hand quantity resulting from the current transaction

2. Location Costing Group Total Value – Location costing group total value prior to the transaction + transaction value at location

3. Group Average Cost Across All Locations – Location costing group total value result from the current transaction

Transactions process group average costing as follows.

Item Fulfillment

An item fulfillment uses the group average cost. Therefore, the group average cost does not change due to the transaction.

Item Receipt or Inventory Adjustment

An item receipt or inventory adjustment can have a rate that is different from the group average cost. Therefore, the group average cost of the item can change due to the transaction.

The group average cost fluctuates over time as transactions are entered.

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An administrator can use the following procedure to enable the Group Average Costing feature.

To enable group average costing:

1. Go to Setup > Company > Setup Tasks > Enable Features..

2. Click the Items & Inventory subtab, and then check the Group Average Costing box.

3. Click Save.

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Create a location costing group record to track the locations associated with that group.

To create a location costing group:

1. Go to Setup > Accounting > Location Costing Groups.

2. Enter a Name for the group.

3. Optionally enter a Memo. Later, you can search for the text you enter.

4. If you use NetSuite OneWorld, in the Costing Group Currency field, select a currency to limit the subsidiaries available for the costing group.

5. Click the Location subtab.

6. In the Select column, check the box next to each location you want to be a member of this group.

   The location list on the location costing group record is filtered by your permission to access each location and subsidiary.

7. Click Save.

   The location costing group you created appears in the Costing Group field on item records.

You can assign a location to a location costing group in two ways:

• On the location record, select the appropriate location costing group.

• On the location costing group record, select the location.

  A location can be assigned to only one location costing group. Locations are not required to be assigned to a location costing group.

General Notices