In Microsoft Dynamics NAV, when doing costing and profitability analysis, you need to differentiate between a transaction’s True Cost and Accounting Cost. Don’t bother looking up these terms in the manual, I made them up for a lack of better terms.

To better explain the difference between True Cost and Accounting Cost, we will use this example:

8/15/08 - Item A was received at 10 pieces for $2.00 each.
8/30/08 - 6 pieces of item A was sold for $5.00 per piece
9/1/08 - The vendor invoice for Item A is posted at $3.00 per piece
9/15/08 - The freight invoice came in and item charge is used to allocate an additional $1.00 per piece
9/20/08 - The rest of the 4 pieces of item A was sold for $5.00 per piece

Accounting Cost:
Assuming on 9/30/08, you’re asked to do a sales analysis for the month of August. When the costing is analyzed for the sales made on 8/30/08, the COGS that accounting recognize will be $2.00 per piece. This means that if we’re printing reports based on Value Entry posting date filter from 8/1/08 to 8/31/08, the profit margin would be 60% per piece. Not bad! For accounting, the cost is indeed $2.00 per piece since that’s the only amount that was recognized in that period. (Some companies makes an accrual on the G/L side for the expected cost of good sold, but that’s a separate topic). This number to management, of course, is incorrect.

True Cost:
In actuality, the cost of the item should be $4.00 per piece because each piece came in at $3.00 with an additional $1.00 in freight charges. The margin of the item should be 20%.

Another scenerio is you’re running the sales report from 9/1/08 to 9/15/08, you would show 0 quantities sold, but the cost recognized in that period would be $12.00 ($1.00 in the additional vendor cost + $1.00 in the freight cost * 6 pieces sold). If you did not check this report and you present this report to the management, be prepared field a load questions on the integrity of both you and the numbers.

Solution:
Both Accounting Cost and the True Cost are correct! Do not assume otherwise! It’s just a matter of how the user wants to look at the numbers. For accounting, they need the numbers to be recognized in the proper periods so the previous period numbers does not get changed. For management, they want to see the true cost of sales transaction. What to do?

As a simple rule, the Value Entry stores the accounting cost, the Item Ledger Entry stores the true cost. Since most NAV reports dealing with Contribution Margin uses Value Entry table, we typically remove those field from the report because they are misleading for everyone. We create separate reports using the Item Ledger Entry table taking the Cost Amount (Actual) since it rolls up all the costs associated with the sale transaction.

One thing to note when presenting the report off of the item ledger to the management, depending on when you post the vendor invoice and other landed cost charges, the profitability number will change. This means that, in our example, the profitability report ran on 9/1/08 will be different than the same report with the same filters ran on 9/20/08. However, in my experience, once you properly explain this concept to accounting and management, they will understand.

[EDIT] You can also use the Value Entry table for calculating True Cost. However, just filter on the Valuation Date instead of the Posting Date.

Here are a couple of reasons why you would get inventory value if you have 0 quantities when you print Inventory Valuation report and Inventory to G/L Reconcile report as of a certain date.

Scenario 1:

If the adjust cost is processed on 7/31/07, and the Allow Posting From was 7/1/07 on General Ledger Setup, the following would occur:

6/15/07 - Purchase Receipt - $10

6/28/07 - Ship and Invoice - $10

7/15/07 - Purchase Invoice - $12

7/31/07 - Additional Cost for the sale made on 6/28/07 - $2

In this case, when you print the inventory valuation as of 6/30/07, the inventory quantity would be 0 and the inventory value would be 0.

Scenario 2:

If the adjust cost is processed on 7/31/07, and the Allow Posting From was 6/1/07 on General Ledger Setup, the following would occur:

6/15/07 - Purchase Receipt - $10

6/28/07 - Ship and Invoice - $10

7/15/07 - Purchase Invoice - $12

6/28/07 - Additional Cost for the sale made on 6/28/07 - $2

In this case, when you print the inventory valuation as of 6/30/07, the inventory quantity would be 0 and the inventory value would be -$2.00.

Explaination

Navision will automatically post the additional cost to the original invoicing entry because that’s where the cost originally applies to. If Navision detects that the Allow Posting From is before the adjusting date, then it will use whatever the Posting Date is when the adjust cost is ran.

Scenario 3:

If the adjust cost is processed on 8/31/07, and the Allow Posting From was 7/1/07 on General Ledger Setup, the following would occur:

6/15/07 - Purchase Receipt - $10

6/28/07 - Ship and Invoice - $10

7/15/07 - Purchase Invoice - $12

8/31/07 - Additional Cost for the sale made on 6/28/07 - $2

In this case, when you print the inventory valuation as of 6/30/07, the inventory quantity would be 0 and the inventory value would be 0. When you print the inventory valuation as of 7/31/07, the inventory quantity would be 0, but the inventory value would be $2.00.

Explaination

Navision will automatically post the additional cost to the original invoicing entry because that’s where the cost originally applies to. If Navision detects that the Allow Posting From is before the adjusting date, then it will use whatever the Posting Date is when the adjust cost is ran. In this example, since the Adjust Cost process posting date is 8/31/07, it will use this date as the Posting Date for the adjusting entry.