3.0 Replacement Cost considerations when re-pricing from a price file.

The replacement cost method pulls the replacement cost from the current cost of the part from the part record when it is removed from inventory.

To work through some common questions and scenarios that could cause a book to physical variance using this method, let's assume we have a part that cost 5 dollars.  The newest price file update and reprice takes the cost of that part to 6 dollars.  I currently have 5 on hand and one that is on an open order.

• Open work orders - any item on an open work order is not repriced; resulting in the GP based on cost when item was added to a work order. 
  • This is correct.  The part would have to be updated on the order to pull in the new cost. As it is, it would post to inventory at the $5 cost it had when added to the order. It would also not reprice itself unless refreshed so it would reflect the old cost/sell unless you update it on the order.  
• Repriced part is added to a work order and the actual cost of this part is not reflected.  This results in a lower GP being reflected on the income statement (assumes actual cost is less than the last reprice cost); assumes part is pulled from inventory at the new cost. 
  • This is correct.  Even though you paid $5 for these parts, with the new cost increase when you add it to a new order the cost will be reflected as $6 and the margin will be calculated against this new cost. It will be relieved from inventory at $6, although it was received into inventory at $5.
• General Ledger costs are based off of AP invoice posting and this results in a discrepancy between parts inventory values in the parts system and the general ledger system;  
  • This is also correct.  I paid 25 for the parts in my inventory.  When I increase that cost in the parts record, the value of the parts will rise to 30 on my inventory valuation reports.  My GL account would remain unchanged and still reflect the $25 I put into my inventory GL via AP invoice entry.
• General ledger is credited for the new cost amount resulting in additional discrepancy between the GL and parts system
  •  Correct-   It will be relieved from inventory at $6, although it was received into inventory at $5.
• We are using a WIP account but not an accrued PO account.  If we added an accrued PO account would this impact the gross profit calculation and the discrepancy between the GL accounts and parts system?  
  • This does not apply to parts sales, because replacement cost will always pull the cost from parts record.  Let's say you paid 5.50 for a part after the new re-price.
  • I receive the part in at 5.50, and this goes to my accrued PO account.
  • I pay the invoice for 5.50 and add 5.50 to my parts inventory GL account in Ap invoice entry.
  • I sell the part with a cost of $6 on a parts order and inventory is credited for $6 on that order when invoiced.

Otherwise, the recommendation has been that when you perform a reprice, you need to take an inventory valuation before the reprice, and then another one after the reprice and calculate the amount that you have adjusted your inventory by.  You would then need to manually account for this variance in the inventory GL account with a journal entry.

For example, on the part we discussed above:

I take an inventory valuation of the parts via the inventory valuation report.  My parts show $25 value.

I run the reprice.

I take another inventory valuation of the parts and see the new value is $30.

I make a corresponding entry into my inventory GL account for a $5 debit to account for the increase in value on the parts side to keep my book to physical in line.