For Inventory Cost Method, the system utilizes the Current Cost.  To more fully understand R365's Current Cost process, please read through the following use case:

Case: A customer is using Restaurant365 for Inventory tracking.  The customer purchases a new Purchased Item and does not have an existing balance of inventory on hand.  Additionally, the customer has not yet performed a Stock Count that included the new Purchased Item.

Event 1 - Purchase inventory and record AP Invoice (8/25)

Cost Tracking

DateTrx TypeQtyCostTotalExpenseRun ExpRun QtyRun Value
8/25/2018AP Invoice10\$8\$80\$80\$800\$0

Current Cost Result - The system assumes that the \$80 worth of inventory (10 units at \$8 / unit = \$80.00) that has just been purchased will all be used.  Thus, all of the inventory is expensed immediately. Once a Stock Count is performed, the true cost will be reflected based on the quantity on hand and quantity purchased.

Journal Entry Result

1) Debit Cost Account \$80.00

2) Credit AP \$80.00

Event 2 - Perform Stock Count (8/31)

Cost Tracking

DateTrx TypeQtyCostTotalExpenseRun ExpRun QtyRun Value
8/25/2018AP Inv10\$8\$80\$80\$800\$0
8/31/2018Count2\$8\$16(\$16)\$642\$16

Current Cost Result - In our example, the AP invoice in Event #1 was first time this item was purchased, so on this first stock count the Previous Count = 0.  When the quantity of 10 units was purchased on 8/25, all 10 were recorded to our Cost account.  Now with the first count in the system for 'Sample Item', the quantity currently on hand, 2, is recorded.  The system then records an adjustment, adding the full value of the 2 items (\$8 * 2 = \$16.00) to the Inventory Account and reducing the full value of the 2 items (\$8 * 2 = \$16.00) from the Cost Account.  This occurs because the entire cost of the AP Invoice in Event 1 was recorded to the Cost Account.  At the completion of our count, there are 2 items that were not used, therefore the cost that was previously booked to the Cost Account is reduced by the full value of the remaining items.

Cost Origin Explanation - The Cost Amount (\$8 * 2 = \$16.00) originates from the Inventory Cost field on the Purchased Item record (or if Item Locations is in use, on the 'Item Locations' tab of the Purchased Item record).  Click here for a screenshot of the Inventory Cost tab of the 'Sample Item'.  Inventory Cost is set based on the Cost Update Method on the individual Purchased Item record Purchasing tab.  These methods include: Auto Update From Invoice (Current Cost from last Approved AP Invoice), Auto Update Last 3 Invoices (Average Cost of last 3 Approved AP Invoices), and Manual (managed by user).  In this use case, the Cost Update Method for the 'Sample Item' is set to Auto Update From Invoice.

Journal Entry Result

1) Debit Inventory Account \$16.00

2) Credit Cost Account \$16.00

Event 3 - Purchase inventory and record AP Invoice (9/10)

Cost Tracking

DateTrx TypeQtyCostTotalExpenseRun ExpRun QtyRun Value
8/25/2018AP Inv10\$8\$80\$80\$800\$0
8/31/2018Count2\$8\$16(\$16)\$642\$16
9/10/2018AP Inv10\$9\$90\$90\$1542\$16

Current Cost Result - Once again, the system assumes that the \$90 worth of inventory (10 units at \$9 / unit = \$90.00) that has just been purchased will all be used.  Thus, all of the inventory is expensed immediately.  In addition to expensing the inventory, the Inventory Cost of the Purchased Item 'Sample Item' has been updated to reflect the price on the Approved Invoice, as shown on the Inventory Cost tab. Similarly to the first invoice in Event 1, upon completion of the next Stock Count, the true cost will be reflected based on our quantity on hand and quantity purchased.

Journal Entry Result

1) Debit Cost Account \$90.00

2) Credit AP \$90.00

Event 4 - Receive AP Credit and record AP Credit Memo (9/15)

Cost Tracking

DateTrx TypeQtyCostTotalExpenseRun ExpRun QtyRun Value
8/25/2018AP Inv10\$8\$80\$80\$800\$0
8/31/2018Count2\$8\$16(\$16)\$642\$16
9/10/2018AP Inv10\$9\$90\$90\$1542\$16
9/15/2018AP Credit3\$9\$27(\$27)\$2372\$16

Current Cost Result - The AP Credit Memo alleviates the Cost (\$9 * 3 = \$27.00) immediately as the Purchase value (the value being altered via the AP Credit Memo) was expensed immediately upon creation of the AP Invoice

Journal Entry Result

1) Debit AP \$27.00

2) Credit Cost Account \$27.00

Event 5 - Purchase inventory and record AP Invoice (9/20)

Cost Tracking

DateTrx TypeQtyCostTotalExpenseRun ExpRun QtyRun Value
8/25/2018AP Inv10\$8\$80\$80\$800\$0
8/31/2018Count2\$8\$16(\$16)\$642\$16
9/10/2018AP Inv10\$9\$90\$90\$1542\$16
9/15/2018AP Credit3\$9\$27(\$27)\$2372\$16
9/20/2018AP Inv11\$10\$110\$110\$2642\$16

Current Cost Result - For a third time, the system assumes that the \$110 worth of inventory (11 units at \$10 / unit = \$110.00) that has just been purchased will all be used.  Thus, all of the inventory is expensed immediately.  In addition to expensing the inventory, the Inventory Cost of the Purchased Item 'Sample Item' has been updated to reflect the price on the Approved Invoice, as shown on the Inventory Cost tab.

Journal Entry Result

1) Debit Cost Account \$110.00

2) Credit AP \$110.00

Event 6 - Perform Stock Count (9/30)

Cost Tracking

DateTrx TypeQtyCostTotalExpenseRun ExpRun QtyRun Value
8/25/2018AP Inv10\$8\$80\$80\$800\$0
8/31/2018Count2\$8\$16(\$16)\$642\$16
9/10/2018AP Inv10\$9\$90\$90\$1542\$16
9/15/2018AP Credit3\$9\$27(\$27)\$2372\$16
9/20/2018AP Inv11\$10\$110\$110\$2642\$16
9/30/2018Count2\$10\$20(\$4)\$2332\$20

Current Cost Result - This Stock Count represents the second time that the item 'Sample Item' has been counted; therefore, the starting count for the 'Sample Item' would be the ending count from the previous Stock Count or rather 2 units.  Since inventory is always valued at the Current Cost, an adjustment is made to remove the previous counted value of \$16 (recorded from the Stock Count in Event 2) and then record the current counted value of \$20. This change in value is due to the varying costs on the Purchased Item itself.

At the time of the Stock Count in Event 2, the Current Cost of 'Sample Item' was \$8 / unit.  At the time of this Stock Count in Event 6, the Current Cost has risen to \$10 / unit (via the AP Invoice in Event 5).  That change in Current Cost represents an increase of \$4 from the previous count:

Event 2: \$8 * 2 = \$16.00

Event 6: \$10 * 2 = \$20.00

--------------------------------

Difference: \$4.00

The resulting distribution is to add the adjusted value (\$20 - \$16 = \$4) to the Inventory Account and reduce the adjusted value from the Cost Account. In other words, the system has updated the GL to reflect the changes in value of the inventory.  All past units have been consumed and all current units are now recognized at their respective Current Cost.

Journal Entry Result

1) Debit Inventory Account \$4.00

2) Credit Cost Account \$4.00

Conclusion

This process will continue in perpetuity, with the Inventory being consumed and all remaining inventory being adjusted to reflect the most Current Cost.