Acquisition Cost

Acquisition Cost Methods

The acquisition cost is usually computed on a first-in-first-out (FIFO) basis, last-in-first-out (LIFO) basis or average cost basis. M3 can compute the acquisition value using all three inventory systems and indicates the system which results in the lowest value.

FIFO

With the FIFO inventory system, the oldest inventory is the first to be used.

Example: 100 units of a product are needed. The following is available in inventory:

No. Units	Unit Price in USD	Entry Date
75	11	1 March
50	10	1 February
75	9	1 January

To reach the 100 units, we need to take all units that came in on 1 January and 25 of the 50 units that came in on 1 February. The total inventory value for the remaining 100 units is, according to FIFO,

(25x10)+(75x11) = USD 1,075.

LIFO

With the LIFO inventory system, the most recently received inventory is the first to be used.

If the LIFO inventory system had been used in the above example, we would have first taken the 75 units at USD 11 that came in on 1 March, and then the 25 of the 50 units at USD 10 that came in on 1 February. The total inventory value for the remaining 100 units is, in this case, (25x10)+(75x9) = USD 925.

Average Cost

With this inventory system, an average cost is computed for all received transactions. This system can be used for goods that are regularly received and do not show great variations in cost.

Using this system, the inventory value is computed as the current quantity multiplied by the current average cost.

In the example above, the average cost is USD 10. This is computed by adding the value of all 200 units (USD 2,000) and then dividing the total by the total quantity. After we take out the 100 units on 1 March, the inventory value is then 100x10 = USD 1,000.

The average cost from the last record in the average cost history file on the valuation date is used by default.

However, you can have the average cost recalculated when the inventory value is calculated in 'Inventory Value. Open' (CAS180) by selecting the '265 Recalculate average cost at inventory valuation' check box in 'Settings - General Ledger' (CAS900/G).

A new average cost is then calculated from the stock transaction history file. All positive stock transactions (which normally update the average cost) from the date when the on-hand balance was zero until the valuation date are included.

If you select this alternative, we recommend that you select the ´260 Replace the acquisition cost with invoice price' check box in (CAS900/G). The reason for this is that any price variances from the invoice matching are then included in the average cost calculation.

Also note that by selecting this alternative, all receipt transactions from the run date back to the date when the on-hand balance was zero are included in the inventory valuation.

Invoice Price as Acquisition Cost

The acquisition cost from 'Stock Transaction. Display History' (MWS070) is by default used for all transactions.

However, you can use the invoice price as the acquisition cost when calculating the inventory value in (CAS180) by selecting the '260 Use invoice price as acquisition cost in inventory valuation' check box in 'Settings - General Ledger' (CAS900/G).

The program then first search for an invoice for each purchase order line. If an invoice is found, the invoice price replaces the acquisition cost from 'Stock Transaction. Display History'(MWS070). If this invoice price is not already in the local currency for the division, it is converted by applying the saved exchange rate used for the invoice.

When the FIFO and LIFO values are presented in 'Inventory Valuation. Display FIFO Value' (CAS191) and 'Inventory Valuation. Display LIFO Value' (CAS192), an asterisk (*) is displayed in front of the line to indicate that the acquisition cost is replaced by the invoice price.