Costing Method Considerations

Why the FIFO Costing Method?

GoldFinch’s advanced FIFO (First In, First Out) Costing Method offers real-time and accurate sales and profitability tracking while ensuring timely closing of accounting periods. While Average, Standard, LIFO, and FIFO are all acceptable costing methods for manufacturers and distributors, GoldFinch strongly recommends FIFO for companies that process a high volume of transactions, have multiple formula levels, and need to transfer orders between multiple warehouses. Here’s why:

Benefits of the FIFO Costing Method:

1. Accurate and Up-to-Date Inventory Costs:

   • Inventory costs for each sale and shipment are always accurate, even when selling inventory before receiving the final vendor invoice. Any changes due to "timing" only impact the open accounting period, not the closed ones.

2. Limited Impact of Costing Mistakes:

   • Mistakes in inventory costs only affect one layer of inventory and its subsequent outbound transactions. Correcting errors is faster and involves less risk, as it’s isolated to one specific layer.

3. Additional Cost Adjustments:

   • You can easily add additional costs (e.g., landed costs) or write off obsolete inventory costs without impacting other inventory layers.

4. Minimal Month-End Reconciliation:

   • GoldFinch automatically recalculates any "timing differences" to ensure the inventory General Ledger cost aligns with the Subledger cost, reducing the effort required for month-end inventory reconciliation.

5. Tracking Uninvoiced Costs:

   • GoldFinch tracks inventory costs that have been received but not invoiced, shipped but not invoiced, and output but not costed, ensuring complete visibility over pending costs.

6. Standard Cost Roll-Up Capability:

   • GoldFinch provides standard costing fields on the item card with the capability to roll up costs. While Service Items require the Standard Cost field to be populated, it’s also recommended to fill this field for inventory items. Learn more about rolling up standard costs by visiting this guide.

Why Not the Average Costing Method?

The Average Costing Method can generate excessive cost adjustment entries and consume significant Salesforce data storage. This is due to the constant recalculations needed when inventory values change due to "timing" or error correction. Unlike FIFO, average costing requires recalculating outbound costs for all inventory layers, not just one specific layer.

Additionally, when adding costs like landed costs or writing off obsolete inventory, all inventory layers are affected, meaning the Cost of Goods Sold (COGS) for a particular Sales Invoice may not reflect the actual costs.

What About the Standard Costing Method?

While Standard Costing is relatively easy to implement, it lacks accuracy in transaction-level costing. Considerable manual effort is required at the period's end to determine the correct purchase cost for raw materials and roll up standard costs for parent items. Additionally, reclassifying variances at month-end can be time-consuming.

Standard Costing also doesn’t provide a way to track additional costs or write off costs to a specific layer of inventory, making it less flexible than FIFO. However, it may be preferred for project management companies, where material costs fluctuate significantly.

Summary

GoldFinch supports both the FIFO Costing Method and the Standard Cost Method. You must choose one of these methods for all items in your system.

• FIFO Costing Method: If you decide to use FIFO, check the Disable Standard Costing Method option in Company Setup. This ensures the Standard Cost Method cannot be selected for any item.

• Standard Costing Method: To use the Standard Costing Method, uncheck the Disable Standard Costing Method option. You will need to configure a custom Validation Rule on the Item object to ensure all items follow the Standard Costing Method.

By selecting the appropriate costing method based on your company’s needs, you ensure accurate and efficient inventory costing and financial reporting.