I am stuck in a situation where I need to come up with an effective way to calculate cost of pipes which is bought in KG and is sold in length and record cost for profit calculation in accounts..
things to consider:
Even if i weight the pipes in feet and meter and add conversion quantities it wont work... because the material used in manufacturing varies sometimes there is e.g. 1000ft in 50 kg and sometimes there is 1150ft in the same weight..
The bundles purchased are sometimes of 52kg, 49kg and 50kg.
Ideas:
(a. i could purchase in unit... and sell in feet and have a customization where after every order i have an option to mark the end of product.. and when i mark the end of the product the purchase cost i.e. $1000 can be divided by the length sold... but issue is it might take a week to sell the product, so it wont show accurate profit at end of day alterntively i can have an approximate cost and have it replaced once the item has ended? thats the best i can come up with. The con of this is what if its time for closing accounts of the year and only half of the bundle has been sold?
what would be the most accurate way of handing this logic in any ERP? POS? The reason i tagged Magento, SAP because i am curious how Magento and SAP handles this situation?
I am feeling accountants and accounts and finance related guys can also chip in, so I am adding the accounting tag
You need to have different UoM for this kind of Item. Purchasing UoM, Inventory UoM, and Sales UoM. I will consider the Inventory and Sales UoM as the same.
Pipe_A001:
Purchase = Kg |
Inventory = meter |
Sales = meter
So, the challenge is to have the measurement in your Inventory UoM then get the price cost, and you need to take into account when you actually receive against the cost they charge in the Invoice.
Ex: you buy on Aug 1, your PO is 50 Kg @ $ 10/Kg, so it Cost you $ 500. Receive actually 49 Kg, but they still charge you for the PO amount which is $ 500.
The 49 Kg is not relevant anymore, since you own the item and you will convert to your measurement which is meter. Let's say you measure and it's 320 meter, so the cost per meter is $ 500 / 320m = $ 1.5625/m.
The next batch on Aug 15, you buy another 50 Kg at the same price. Receive 51 Kg, Invoiced $ 500, Length measured 350m. So now you will have the new batch price which is $ 500 / 350m = $ 1.4285/m.
What matters is not the Kg received, but the cost the Supplier Invoiced and the measurement in your Inventory UoM. You might have an agreement with Supplier that they charge only the weight measured at your receiving point.
From this point, it is back to your procedure whether to count as FIFO with different batch or count as Moving Average.