Tracking your product cost and inventory valuation

Purchase price and Cost are two different numbers

The Purchase Price (PP) is the default price being used when creating a Purchase Order. The product Cost refers to the cost to acquire or create a product and can vary each time you add products to your inventory.

erplain uses the Moving Average Cost (MAC) method to calculate the product cost and inventory valuation.  The MAC of each product is calculated after every Purchase Order (except drop shipping), Stock Entry or when creating a new product (Initial cost). 

For example, if you create a Purchase Order for 100 Product A at $20,  (or do a Stock Entry) and 2 weeks later, buy 100 more at $10, your MAC will be $15.

Please note that the Moving Average Cost for each product is calculated ONLY when your On-hand inventory is above zero. For example, if your On-hand inventory is -6 and you purchase 10 items, then the Cost will be calculated only on 4 items (10 - 6).

If your Available inventory is below zero, the MAC will be calculated normally as it is only based on the On-Hand inventory.

You can find more details on the Moving Average Cost method on this page.

Tutorial video

Purchase Order and Purchase Delivery
When adding products to your inventory with a Purchase Order, erplain will use the price saved in the 'Purchase Delivery' (created from the PO) to calculate the MAC.  erplain calculates the valuation only as your products come in. 

Shipping Costs (Purchase orders)
Shipping costs are added to the cost calculation. For example, if the Shipping Costs are $500 and the Purchase Delivery contains 100 products then $5 (500/100) will be added to the product cost for this transaction.

The Initial Cost
The Initial cost (when creating a new product) is the starting point of this cost calculation. If you have not entered the Initial cost in your products, it will be 0 but you can update this field by editing your products. In many cases, at the time of setup, the initial cost can be the same as the purchase price. The initial cost is a unit cost and will be in your primary currency:

Stock entries
If you create stock entries, make sure to enter the cost of your products, it is being used for the calculation of the MAC. It will show by default the current MAC for the products added to the stock entry:

Inventory valuation reports
Once your costs are tracked in erplain, you can check your inventory valuation in these 2 reports from the Intelligence menu.

Note that your margin in the sales reports is also calculated from your product costs.

Inventory Valuation Details
If you need to see all the transactions that went into the MAC calculation for one of your products, you can go to menu Intelligence, and open the 'Inventory Valuation' report.  For each product, you will be able to open the Inventory valuation details by clicking on the 'Details' button:

You will then see all the transactions that led to the MAC of your product:

The Cost or MAC of an Assembly
The Moving Average Cost (MAC) of an Assembly is the sum of the MAC of its components.

Let's take an example:

'Assembly AB' is made of 1 Component A, 2 Component B and 1 Assembly charge (non-inventory product)

The MAC of Component A is $5

The MAC of Component B is $7

The Cost of Assembly Charge is $10

Then the MAC of 'Assembly AB' is 5 + (2x7) + 10 = 29

The MAC of Component A and Component B might vary over time as explained in this page but the MAC of 'Assembly AB' will always be the sum of the MAC of its components.

Important: For customers connecting erplain to QuickBooks Online, please review this page.

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