Inventory: Negative Unit Cost value on Inventory Items and its impact when processing invoices

Let’s explain this issue by making use of the following scenario:

1. The example Inventory Item (SAM-X) makes use of the Average Unit Cost costing method.

2. The current Average Unit Cost of this item is R90, having 10 units in stock.

3. A Return to Supplier transaction is processed for 7 units at a higher cost value than the current Average Cost, e.g. at R500 (VAT Excl.)

4. The result is therefore a negative Average Cost Value as can be seen below

5. If you now select this Item on a Sales Invoice, notice the following warning message (even before processing) as displayed below and you can click the OK button to continue.

However, please note:

If you still accept the current negative Average Cost value and continue to process the invoice, a potential wrong Gross Profit

may be calculated as a result, in addition to having incorrect Inventory Control and Cost of Goods Sold GL account movements.

      For instance, in this case the invoice is processed as below.

     As a result, if you drill down on the invoice audit trial (from the Inventory Enquiry screen), you’ll notice the following scenario:

• The Stock account is debited (R750). Usually the Stock account is CREDITED when invoicing any stock items.
• The Cost of Goods Sold account is Credited (R750).  Usually the Cost of Goods Sold account is DEBITED when invoicing any stock items.

     You should therefore immediately do the following when the warning message in step 5 is observed:

• Halt the processing of invoices (and all other transactions).
• Evaluate the true cost of the stock item and process an Inventory | Transactions | Adjustments to correct the stock item’s cost value. 

     Continue to process invoices and other transactions on this item.

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