Trade and Logistics 3 (Item setup 2)

Item setup: Inventory model group


In this training Session, we continue setting up the Bottle item. Now, we will study Inventory model groups.

Inventory model group

Why is this field mandatory?
What else should we know about an item?
As you understand it is not the size, weight, or color – it is something that all items must have. Let’s assume that a company purchases four  items for the cost of $5 and three items for the cost of $6. So, the total items’ cost is 4*$5+3*$6=38$. The company sells two items. Now, there are 4+3–2=5 items in the company warehouse. And how much items’ cost remains?

Possible variants:

1. (4 – 2) * $5 + 3 * $6             = $28       (the company has sold two items that cost $5)
2. (4 – 1) * $5 + (3 – 1) * $6    = $27       (the company has sold one item that costs $5 and one item that costs $6)
3. 4 * $5          + (3 – 2) * 6$    = $26       (the company has sold two items that cost $6).

We can’t answer this question accurately because we only know that there are six items remaining in the warehouse and we don’t know which items are sold. The first and the main purpose of the Inventory model group is to set up the rules for calculating of item cost (of those items that are still in the warehouse and those that are sold).

We can set up the following rules for an inventory models to calculate item’s cost:

• FIFO – First in First out. Means that the first purchased item is first sold. In our example, we purchased four items for the cost of $5 first, so these items will be first sold. After the items are sold, the items’ cost in the warehouse will be (4 – 2) * $5 + 3 * $6 = $28.
• LIFO – Last in First out. Meaning that the first purchased item is last sold. In our example, we purchased three items for the cost of $6 last, so these items will be first sold. After the items are sold, the items’ cost in the warehouse will be 4 * $5 + (3 – 2) * 6$ = $26.
• Weighted avg. – in this case, the average cost is calculated and subtracted from the warehouse items’ cost when the item is sold. In our example, the average cost is (4 * $5 + 3 * $6) / 7 = $5.43. After the items are sold, the items’ cost in the warehouse will be (7 – 2) * $5.43 = $27.15.
• Standard cost – this inventory model uses a specific price as cost. The price can be entered manually or calculated automatically. This price is used as cost for purchase and selling. For example, we have a standard cost price of $5.5. So, we purchase all items for this price ($5.5). The total items’ cost before the selling is 4 * $5.5 + 3* $5.5 = $38.5. After two items are sold, the items’ cost in the warehouse will be (7-2) * $5.5 = $27.5.
• LIFO date – this model equals to LIFO with the only difference being that purchase and selling dates are taken into account. For example, a company purchases four items for the cost of $5 on October, 11, three items for the cost of $6 on October, 11 and two items for the cost of $7 on October, 13. The company sells two items on October 11, but the Sales manager was out of office and didn’t post the sales. The Sales manager came back to the office on October, 13 and posted the sales backdate to October, 11. The sales posting process will decrease the cost of items in the warehouse at 2 * $6 (item’s last cost as of October, 11). If the LIFO inventory model is used, the sales process will decrease the cost of items in the warehouse to 2*7$ (because 7$ is the last cost received into the warehouse).
• Weighted avg. date. – this model equals to the Weighted avg with the only difference being that the average amount is calculated for a separate day. For example, a company purchases four items for the cost of $5 on October, 11, three items for the cost of $6 on October, 13 and two items for the cost of $7 on October, 13. The company sells two items on October, 13. The average cost price will be (3 * $6 + 2 * $7) / (3 +2) = $6.4, note that four items at the price of $5 are not included in the average cost price calculation because they have been purchased on another day.

We will use the FIFO inventory model group for the Bottle and Can items. The inventory model group called FIFO is already created in our demo data (Creating a New Company) used for training.

You can create your own inventory model group. Go to Inventory management > Setup > Inventory > Inventory model group and create a new record with the following setup:

Overview tab

Setup tab

Inventory model tab

As you can see from screen shots an Inventory model group has a few more parameters. You can also specify the following parameters:

• Whether physical and financial negative inventory is permitted
• Whether inventory transactions are to be posted to the General ledger
• The workflow used when you send or receive items
• The reservation rules, when you create sales order lines for items where some or all of the quantity of the item has the status Ordered

These parameters will be explained later in practice.
Now, we assign an inventory model group to the Bottle item (back to the Item > General tab).

Assign inventory model group with Bottle item

 

Summary


In the Inventory model group training lesson, we understand the purpose of an Inventory model group.

Our new item named Bottle has the Packaging item group with a specific general ledger account and the FIFO inventory model group. In the next post, we will study an Inventory dimension group and finish the item setup.


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