Wednesday, March 16, 2011

Average cost variance

In average costing, each receipt of material to inventory updates the unit cost of the item received. Issues from inventory use the current average cost as the unit cost. 

Perpetual Inventory value = Avg unit cost X Quantity

In Oracle Inventory, Inventory balances can be driven negative if the Allow Negative Balances parameter is
set in the Organization Parameters. Inventory calculates the costs differently in case we have negative inventory balances.   

Lets say, we have an on-hand quantity of -40 and we are performing a receipt of 50 quantity that would drive the quantity positive 10. This transaction would be split in two parts as below

a. Quantity required to drive on-hand from negative to zero 
In our example, this quantity would be "40". Inventory receives this quantity of "40" with current average cost and does not use the transaction cost

b. Remaining Quantity
Remaining quantity of "10" (50 minus 40) is received at the transaction cost and hence a new average unit cost is re-calculated

Difference between total receipt cost and the cost debited to inventory is average cost variance

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