AX2009 - Fact Sheet - Inventory Closing - Average Cost Price - Inventory Model Groups v1.0

Holmfirth Consulting Limited
FACT SHEET
Inventory Closing - Average Cost Price - Inventory Model Groups
Prepared by
Andrew Firth
Revision History
Change Record
Date
15/09/2011
Author
Andrew Firth
Version
1.0
Change reference
Published
2|Page
Table of Contents
1 2 ABOUT AVERAGE COST PRICE SPECIFY AN INVENTORY MODEL FOR INVENTORY CLOSE 2.1 FIFO 2.1.1 FIFO without Include physical value 2.1.2 FIFO with Include physical value 2.1.3 FIFO with Marking 2.2 LIFO 2.2.1 LIFO without Include Physical value 2.2.2 LIFO with the Include Physical value 2.2.3 LIFO with Marking 2.3 ABOUT LIFO DATE 2.3.1 LIFO Date without Include Physical value 2.3.2 LIFO Date with Include Physical value 2.3.3 LIFO Date with Marking 2.4 ABOUT WEIGHTED AVERAGE DATE 2.5 PREREQUISITES FOR STANDARD COSTS 3 4 INVENTORY MODEL GROUPS TABS 4.1 OVERVIEW & GENERAL TABS 4.2 SETUP TAB 4.2.1 Negative Stock 4.3 SETUP TAB 4.3.1 Warehouse Management 4.4 SETUP TAB 4.4.1 Ledger Integration 4.5 SETUP TAB 4.5.1 Physical Update 4.6 SETUP TAB 4.6.1 Reservation 4.7 STOCK MODEL TAB 4.7.1 Stock Model 4.8 STOCK MODEL TAB 4.8.1 Cost Price 5 END OF DOCUMENT 43 39 40 40 40 40 40 41 41 41 41 42 42 43 43 43 43 39 4 8 8 8 9 10 12 12 14 15 17 17 18 19 30 37
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1 About Average Cost Price

The inventory close process in Microsoft Dynamics AX settles issue transactions to receipt transactions based on the inventory valuation method that is selected in the item's inventory model group. Before inventory close is run, however, Microsoft Dynamics AX calculates a running Average cost price that in most cases is used for posting issue transactions. Microsoft Dynamics AX estimates this running Average cost price for an item by using the following formula: Estimated price = (physical amount + financial amount) / (physical quantity + financial quantity)
The following table indicates when Microsoft Dynamics AX posts inventory transactions using the running Average cost price, and when it uses the cost price defined on the item master record instead. IF
Both the numerator and denominator are positive The numerator, denominator, or both are negative If the denominator is 0 (zero) THEN Microsoft Dynamics AX uses THEN Microsoft Dynamics AX uses THEN Microsoft Dynamics AX uses
Estimated running average cost price

x
Cost price defined on the item master

Blank
Blank
Blank
* Numerator = (physical amount + financial amount); *Denominator = (physical quantity + financial quantity)
Note If the Include physical value option is not selected for an item, Microsoft Dynamics AX uses 0 (zero) for both physical amount and physical quantity.
On rare occasions, you may encounter a pricing amplification scenario that yields overly inflated running Average cost price estimates. These are possible when Microsoft Dynamics AX prices several issues before it has sufficient receipts to base a price on. There are, however, steps you can take to avoid the issue, or to mitigate its impact when it does occur, as explained in the following scenario.
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Scenario The following transactions occur with an item for which you have applied the Include Physical Value option: 1. You receive 100 @USD 100.00 financially. 2. You issue 200 financially. 3. You receive 101 @USD 202.00 physically. When you examine the estimated running Average cost price for the item, although you expected a cost price of USD 1.51, you discover an estimated running Average of USD 102.00 based on the following formula: Estimated price = [202 + (-100)] / [101 + (-100)] = 102/1 = 102
This occurs because when 200 items are issued financially in step 2, Microsoft Dynamics AX is forced to price 100 of the items before it has any corresponding receipts, which results in negative inventory. Microsoft Dynamics AX then estimates a unit price of USD 1.00, which we might expect, but when the corresponding 100 receipts come, they are at a unit price of USD 2.00 each.
Note Even though the issues result in negative inventory, inventory is positive at the time the issue price is computed. That is why the running Average cost price is used, rather than the price on the item master.
At this point, Microsoft Dynamics AX has an inventory value offset of USD 100.00. And while that offset was built up over 100 pieces, with a unit offset of USD 1.00 each, we now have only one piece in inventory, and that offset of USD 100.00 is allocated to this single piece, resulting in the overly inflated estimated cost price.
Note For comparison, note that if steps 2 and 3 are reversed in the example above, 200 items will be issued at a unit price of USD 1.51, and one piece will remain at a unit price of USD 1.51.
Because this pricing amplification scenario can occur when negative inventory is involved, it is difficult to avoid in the following cases: You must estimate issue prices on the on-hand value and quantity You must adjust the on-hand value and quantity on issues and receipts Your business model allows for sending out, or pricing, more pieces than you have You must accept any receipt value and quantity submitted to you
If your business model allows them, however, the following practices can help you avoid the negative quantities that make the pricing amplification scenario possible: If you select the Include physical value option for an item, then clear the Physical negative inventory check box on the Setup tab in the Inventory model groups form. If you do not select the Include physical value option for an item, then clear the Financial negative inventory option on the Setup tab in the Inventory model groups form.
Bear in mind also that the maximum offset in your physical inventory value is limited by the number of physical transactions and the difference between physical and financial prices. As long as all physical transactions are eventually updated financially, then the physical value cannot rise to extreme levels.
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In addition, the amplification effect decreases significantly when the accumulated offset is spread out over a number of on-hand pieces rather than just one. Inventory transactions can be physically updated and financially updated in Microsoft Dynamics AX, and certain types of physical and financial transactions increase inventory quantities, while others decrease the quantity. This topic provides an overview of which types of transactions increase and decrease inventory quantities. When a physical transaction is posted, the status of the transaction record is Received. The following transactions are considered physical increases: Purchase order receipt Sales order packing slip return Production order report as finish By-product on a production order picking list
When a financial receipt transaction is posted, the status of the transaction record that increases the quantity is Purchased. The following transactions are considered financial increases: Purchase order invoice Sales order invoice for a return Production order costing Positive quantity inventory journals, such as movement, profit loss, counting journals, bills of material, and transfer
When transactions that increase quantity are posted, Microsoft Dynamics AX calculates a running Average cost price that is based on the cost of each of these transactions for each inventory dimension that is being tracked financially. Microsoft Dynamics AX uses the calculated running Average cost price when a transaction that decreases quantity is posted, no matter which inventory model is associates with that inventory, so long as the transaction that decreases quantity was not previously marked to another transaction before posting. If the physical on-hand inventory goes negative, then Microsoft Dynamics AX will use the cost defined for the item on the Price/Discount tab of the Item form.
Note If multi site functionality is enabled, this cost will instead be the inventory cost defined for a site on the Default order settings form.
When a physical issue transaction is posted, the status of the transaction record is Deducted. The following transactions are considered physical issues: Production order picking list journal Sales order packing slip Purchase order packing slip return
When a financial transaction is posted, the status of the transaction record is Sold. The following transactions are considered financial issues: Production order ended Sales order invoice
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Purchase order invoice return Negative quantity inventory journals, such as movement, profit loss, counting journal, bills of material, and transfer
Since transactions that decrease quantity are posted at the running average cost price, the inventory close procedure is needed to settle the issue transaction to a receipt transaction based on the inventory model assigned to an item. The model group setup for an item determines whether physically updated transactions are factored into the calculation of the item's running average cost price. Specifically, if the Include physical value box is selected on the Inventory model tab of the Inventory model groups form, then both physically updated transactions and financially updated transactions will be used to calculate the running average cost price. If the Include physical value box is cleared, only financially updated transactions will be used in the calculation of the running average cost price. The Include physical value parameter leads to some slightly different results depending on the inventory model you choose: If you select the Include physical value box when using the FIFO, LIFO, or LIFO Date inventory models, then inventory close will also make adjustments to physically updated transactions. If you do not select the Include physical value box with these inventory models, then inventory close will make settlements only to financially updated transactions. When you use the weighted average or weighted average date inventory models, inventory close will settle only financially updated transactions whether or not you select the Include physical value box.
Example You have selected the Include physical value box and receive the following purchase orders: Purchase order for a quantity of 2; cost price is USD 10.00; packing slip updated Purchase order for a quantity of 3; cost price is USD 12.00; invoiced updated
In this case, the running average cost price will be USD 11.20 because both physically and financially updated transactions are used to calculate the cost price. Example You have not selected the Include physical value box and the cost price on the item setup is USD 10.00. You receive the following purchase order: Purchase order for a quantity of 20; cost price is USD 12.00; packing slip updated
When a sales order is posted, the system will post the cost amount at USD 10.00 because the running average cost price will not include physically posted transactions.
Note For comparison, if this item had been set up with Include physical value selected, the sales order would have been posted with a cost amount of USD 12.00.
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Specify an Inventory Model for Inventory Close
An inventory model is typically assigned to an item when you are configuring its inventory model group. We recommend, however, that you confirm that the inventory model you want to use for each model group is selected before you run the inventory close procedure. 1. Click Inventory management > Setup > Inventory model groups. 2. Click the Inventory model tab. 3. Make a selection in the Inventory model field. Below are explanations of how different Inventory Models work with different settings First in, First out (FIFO) is an inventory model in which the first acquired receipts are issued first. Financially updated issues from inventory are settled against the first financially updated receipts into inventory based on the financial date of the inventory transaction
2.1
FIFO
When using FIFO, you can choose to mark inventory transactions so that a specific receipt is settled against a specific issue instead of following the FIFO rule.
We recommend a periodic inventory closing when you use the FIFO inventory model.
The following examples illustrate the impact of using FIFO with three different configurations: 2.1.1 FIFO without the Include physical value option FIFO with the Include physical value option FIFO with marking FIFO without Include physical value
In this FIFO example, the inventory model group is not marked to include physical value. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. 1b. Inventory financial receipt for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt for a quantity of 1 at a cost of USD 20.00 each. 2b. Inventory financial receipt for a quantity of 1 at a cost of USD 20.00 each. 3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical receipt for a quantity of 1 at a cost of UD 30.00 each. 4b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each. 5a. Inventory physical issue for a quantity of 1 at cost price of USD 20.00 each (running average of financially updated transactions). 5b. Inventory financial issue for a quantity of 1 at cost price of USD 20.00 each (running average of financially updated transactions). 6. Inventory close is performed. Based on the FIFO method, the first financially updated issue will be settled to the first financially updated receipt. An adjustment of negative USD 10.00 will be made on the issue transaction.
The new running average cost price reflects the average of the financially updated transactions.
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The following diagram illustrates this series of transactions with the effects of choosing the FIFO inventory model without the Include physical value option.
Key to diagram
Inventory transactions are represented by vertical arrows. Receipts into inventory are represented by vertical arrows above the timeline. Issues out of inventory are represented by vertical arrows below the timeline. Above (or below) each vertical arrow, the value of the inventory transaction is specified in the format Quantity@Unit price. An inventory transaction value surrounded by brackets indicates that the inventory transaction is physically posted into inventory. An inventory transaction value without brackets indicates that the inventory transaction is financially posted into inventory. Each new receipt or issue transaction is designated with a new label. Each vertical arrow is labelled with a sequential identifier, such as 1a. The identifiers indicate the sequence of inventory transaction postings in the timeline. Inventory closings are represented by a red vertical dashed line and the label Inventory Close. Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue. FIFO with Include physical value
2.1.2
If the Include physical value box is selected for an item in the Inventory model group form, Microsoft Dynamics AX will use both physical and financial receipt transactions to calculate the running average cost price. Where applicable, the system will also make adjustments to the physically updated issue transaction. When the Include physical value box is cleared, inventory close with the FIFO inventory model will make settlements only to transactions that are financially updated. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. 1b. Inventory financial receipt for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt for a quantity of 1 at a cost of USD 20.00 each. 2b. Inventory financial receipt for a quantity of 1 at a cost of USD 20.00 each. 3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical receipt for a quantity of 1 at a cost of USD 30.00 each. 4b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each. 5a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each (running average of financial and physical updated transactions). 5b. Inventory financial issue for a quantity of 1 at a cost price of USD 21.25 each (running average of financial and physical updated transactions).
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6a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each. 7. Inventory close is performed. Based on the FIFO method, the first financial issue transaction will be adjusted or settled to the first updated receipt, either financial or physical.
Transaction 5b will be settled to the receipt transaction 1b. There will be an adjustment of negative USD 11.25 to this issue transaction. The new running average cost price reflects the average of the financially and physically updated transactions at USD 27.50. The following diagram illustrates this series of transactions with the effects of choosing the FIFO inventory model with the Include physical value option.
Key to diagram
Inventory transactions are represented by vertical arrows. Receipts into inventory are represented by vertical arrows above the timeline. Issues out of inventory are represented by vertical arrows below the timeline. Above (or below) each vertical arrow, the value of the inventory transaction is specified in the format Quantity@Unit price. An inventory transaction value surrounded by brackets indicates that the inventory transaction is physically posted into inventory. An inventory transaction value without brackets indicates that the inventory transaction is financially posted into inventory. Each new receipt or issue transaction is designated with a new label. Each vertical arrow is labelled with a sequential identifier, such as 1a. The identifiers indicate the sequence of inventory transaction postings in the timeline. Inventory closings are represented by a red vertical dashed line and the label Inventory Close. Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue. FIFO with Marking
2.1.3
Marking is a process in Microsoft Dynamics AX that allows you to link, or mark, an issue transaction to a receipt transaction. Marking can occur either before or after a transaction is posted. You can use marking when you want to be sure of the exact cost of the inventory when the transaction is posted or when the inventory close is performed. For example, suppose the Customer Service department accepted a rush order from an important customer. Because this is a rush order, you will have to pay more for this item
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to accommodate your customer's request. You would like to be certain that the cost of this inventory item is reflected in the margin, or cost of goods sold (COGS) for this sales order invoice. When the purchase order is posted, the inventory is received at a cost of USD 120.00. If this sales order document is marked to the purchase order before the packing slip or invoice is posted, the COGS will be USD 120.00 instead of the current running average cost for the item. If the sales order packing slip or invoice is posted before the marking occurs, the COGS will be posted at the running average cost price. Before inventory close is performed these two transactions can still be marked to each other. When a receipt transaction is marked to an issue transaction, the valuation method defined in the item's inventory model group will be disregarded and Microsoft Dynamics AX will settle these transactions to each other. To mark an issue transaction to a receipt before the transaction is posted, open the Sales order form, select a transaction line, and then click the Inventory button on the transaction line and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. To mark an issue transaction to a receipt after the transaction has been posted, navigate to the inventory item on the Transactions on Item form and click the Transaction button. Select the issue transaction that you want to mark, and then click the Inventory button and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. 1b. Inventory financial receipt for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt for a quantity of 1 at a cost of USD 20.00 each. 2b. Inventory financial receipt for a quantity of 1 at a cost of USD 20.00 each. 3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical receipt for a quantity of 1 at a cost of USD 30.00 each. 4b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each. 5a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each (running average of financial and physical updated transactions). 5b. Inventory financial issue for a quantity of 1 is marked to the inventory receipt 2b before the transaction is posted. This transaction is posted at a cost price of USD 20.00 each. 6a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each. 7 Inventory close is performed. Since the financially updated FIFO transaction is marked to an existing receipt, these transactions are settled to each other and no adjustment is made.
The new running average cost price reflects the average of the financially and physically updated transactions at USD 27.50. The following diagram illustrates this series of transactions with the effects of choosing the FIFO inventory model with marking between issues and receipts.
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Key to diagram
Inventory transactions are represented by vertical arrows. Receipts into inventory are represented by vertical arrows above the timeline. Issues out of inventory are represented by vertical arrows below the timeline. Above (or below) each vertical arrow, the value of the inventory transaction is specified in the format Quantity@Unit price. An inventory transaction value surrounded by brackets indicates that the inventory transaction is physically posted into inventory. An inventory transaction value without brackets indicates that the inventory transaction is financially posted into inventory. Each new receipt or issue transaction is designated with a new label. Each vertical arrow is labelled with a sequential identifier, such as 1a. The identifiers indicate the sequence of inventory transaction postings in the timeline. Inventory closings are represented by a red vertical dashed line and the label Inventory Close. Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue.
2.2
LIFO
Last in, First out (LIFO) is an inventory model in which the last (newest) receipts are issued first. Issues from inventory are settled against the last receipts into inventory based on the date of the inventory transaction. When using LIFO, you can choose to mark inventory transactions so that a specific item issue is settled against a specific receipt instead of using the LIFO rule.
We recommend a periodic inventory closing when you use the LIFO inventory model.
The following examples illustrate the impact of using LIFO with three different configurations: 2.2.1 LIFO without the Include physical value option LIFO with the Include physical value option LIFO with marking LIFO without Include Physical value
In this LIFO illustration, the inventory model group is not marked to include physical value. The following transactions are illustrated in the graphic below:
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1a. Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. 1b. Inventory financial receipt for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt for a quantity of 1 at a cost of USD 20.00 each. 2b. Inventory financial receipt for a quantity of 1 at a cost of USD 20.00 each. 3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical receipt for a quantity of 1 at a cost of USD 30.00 each. 4b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each. 5a. Inventory physical issue for a quantity of 1 at a cost price of USD 20.00 each (running average of financially updated transactions). 5b. Inventory financial issue for a quantity of 1 at a cost price of USD 20.00 each (running average of financially updated transactions). 6. Inventory close is performed. Based on the LIFO method, the last financially updated issue will be settled to the last financially updated receipt. An adjustment of USD 10.00 will be made on the issue transaction.
The new running average cost price reflects the average of the financially updated transactions at USD 15.00. The following diagram illustrates this series of transactions with the effects of choosing the LIFO inventory model without the Include physical value option.
Key to diagram
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2.2.2
LIFO with the Include Physical value
If the Include physical value box is selected for an item in the Inventory model groups form, Microsoft Dynamics AX will use both physical and financial receipt transactions to calculate the running average cost price. Where applicable, the system will also make adjustments to the physically updated issue transaction. When the Include physical value box is cleared, inventory close with the LIFO inventory model will make settlements only to transactions that are financially updated. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. 1b. Inventory financial receipt for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt for a quantity of 1 at a cost of USD 20.00 each. 2b. Inventory financial receipt for a quantity of 1 at a cost of USD 20.00 each. 3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical receipt for a quantity of 1 at a cost of USD 30.00 each. 4b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each. 5a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each (running average of financial and physical updated transactions). 5b. Inventory financial issue for a quantity of 1 at a cost price of USD 21.25 each (running average of financial and physical updated transactions). 6a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each. 7. Inventory close is performed. Based on the LIFO method, the last issue transaction will be adjusted or settled to the last updated receipt.
Transaction 6a will be adjusted to the receipt transaction 4b. The system will not settle these transactions since the receipt is updated only physically and not financially. Instead, only an adjustment of USD 8.75 will be posted to the physical issue transaction. Transaction 5b will be adjusted to the physical receipt transaction 3a. The system will not settle these transactions since they are not both financially updated. Instead, only an adjustment of negative USD 3.75 will be made to this issue transaction. The new running average cost price reflects the average of the financially and physically updated transactions at USD 20.00. The following diagram illustrates this series of transactions with the effects of choosing the LIFO inventory model with the Include physical value option.
Key to diagram
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Inventory transactions are represented by vertical arrows. Receipts into inventory are represented by vertical arrows above the timeline. Issues out of inventory are represented by vertical arrows below the timeline. Above (or below) each vertical arrow, the value of the inventory transaction is specified in the format Quantity@Unit price. An inventory transaction value surrounded by brackets indicates that the inventory transaction is physically posted into inventory. An inventory transaction value without brackets indicates that the inventory transaction is financially posted into inventory. Each new receipt or issue transaction is designated with a new label. Each vertical arrow is labelled with a sequential identifier, such as 1a. The identifiers indicate the sequence of inventory transaction postings in the timeline. Inventory closings are represented by a red vertical dashed line and the label Inventory Close. Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue. LIFO with Marking
2.2.3
Marking is process in Microsoft Dynamics AX that allows you to link, or mark, an issue transaction to a receipt transaction. Marking can occur either before or after a transaction is posted. You can use marking when you want to be sure of the exact cost of the inventory when the transaction is posted or when the inventory close is performed. For example, suppose the Customer Service department accepted a rush order from an important customer. Because this is a rush order, you will have to pay more for this item to accommodate your customer's request. You would like to be certain the cost of this inventory item is reflected in the margin or cost of goods sold (COGS), for this sales order invoice. When the purchase order is posted, the inventory is received at a cost of USD 120.00. If this sales order document is marked to the purchase order before the packing slip or invoice is posted, the COGS will be USD 120.00 instead of the current running average cost for the item. If the sales order packing slip or invoice is posted before the marking occurs, the COGS will be posted at the running average cost price. Before inventory close is performed these two transactions can still be marked to each other. To mark an issue transaction to a receipt before the transaction is posted, open the Sales order form, select a transaction line, and then click the Inventory button on the transaction line and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. To mark an issue transaction to a receipt after the transaction has been posted, navigate to the inventory item on the Transactions on Item form and click the Transaction button. Select the issue transaction that you want to mark, and then click the Inventory button and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. The following transactions are illustrated in the graphic below:
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1a. Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. 1b. Inventory financial receipt for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt for a quantity of 1 at a cost of USD 20.00 each. 2b. Inventory financial receipt for a quantity of 1 at a cost of USD 20.00 each. 3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical receipt for a quantity of 1 at a cost of USD 30.00 each. 4b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each. 5a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each (running average of financial and physical updated transactions). 5b. Inventory financial issue for a quantity of 1 is marked to the inventory receipt 2b before the transaction is posted. This transaction is posted with a cost price of USD 20.00 each. 6a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each. 7. Inventory close is performed. Since the financially updated FIFO transaction is marked to an existing receipt, these transactions are settled to each other and no adjustment is made.
The new running average cost price reflects the average of the financially and physically updated transactions at USD 27.50. The following diagram illustrates this series of transactions with the effects of choosing the LIFO inventory model with marking between issues and receipts.
Key to diagram
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2.3
About LIFO Date
Last in, First out Date (LIFO Date) is an inventory model based on the LIFO principle that issues from inventory are settled against the last receipts into inventory based on the date of the inventory transaction. With LIFO Date, if there is no receipt before the issue, the issue is settled against any receipts that occur after the date of the issue. Several issues on the same date may be settled in the order of last issue, last receipt. When using LIFO Date, you can choose to mark inventory transactions so that a specific item receipt is settled against a specific issue instead of using the LIFO Date rule.
We recommend a periodic inventory closing when you use the LIFO Date inventory model.
The following examples illustrate the impact of using LIFO Date with three different configurations: 2.3.1 LIFO Date without the Include physical value option LIFO Date with the Include physical value option LIFO Date with marking LIFO Date without Include Physical value
In this LIFO Date illustration, the inventory model group is not marked to include physical value. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. 1b. Inventory financial receipt for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt for a quantity of 1 at a cost of USD 20.00 each. 2b. Inventory financial receipt for a quantity of 1 at a cost of USD 20.00 each. 3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical issue for a quantity of 1 at a cost price of USD 15.00 (running average of financially updated transactions). 4b. Inventory financial issue for a quantity of 1 at a cost price of USD 15.00 (running average of financially updated transactions). 5a. Inventory physical receipt for a quantity of 1 at a cost of USD 30.00 each. 5b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each. 6. Inventory close is performed. Based on the LIFO Date method, the last financially updated issue will be settled to the last financially updated receipt by date. An adjustment of USD 5.00 will be made on the issue transaction. These transactions will be settled to each other.
The new running average cost price reflects the average of the financially updated transactions at USD 15.00. The following diagram illustrates this series of transactions with the effects of choosing the LIFO Date inventory model without the Include physical value option.
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Key to diagram
If the Include physical value box is selected for an item in the Inventory model groups form, Microsoft Dynamics AX will use both physical and financial receipt transactions to calculate the running average cost price. Where applicable, the system will also make adjustments to the physically updated issue transaction. When the Include physical value box is cleared, inventory close with the LIFO Date inventory model will make settlements only to transactions that are financially updated. 2.3.2 LIFO Date with Include Physical value
In this LIFO Date illustration, the inventory model group is marked to include physical value. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. 1b. Inventory financial receipt for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt for a quantity of 1 at a cost of USD 20.00 each. 2b. Inventory financial receipt for a quantity of 1 at a cost of USD 20.00 each. 3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical issue for a quantity of 1 at a cost price of USD 18.33 each (running average of financially updated transactions). 4b. Inventory financial issue for a quantity of 1 at a cost price USD 18.33 each (running average of financially updated transactions). 5a. Inventory physical receipt for a quantity of 1 at a cost of USD 30.00 each. 5b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each.
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6. Inventory close is performed. Based on the LIFO Date method, the last updated issue will be adjusted or settled to the last updated receipt by date. These transactions will not be settled to each other since the financial receipt transaction is adjusted to a physical update transaction. Instead only an adjustment of USD 6.67 will be made on the issue transaction.
The new running average cost price reflects the average of the financially updated transactions at USD 20.00. The following diagram illustrates this series of transactions with the effects of choosing the LIFO inventory model with the Include physical value option.
Key to diagram
Inventory transactions are represented by vertical arrows. Receipts into inventory are represented by vertical arrows above the timeline. Issues out of inventory are represented by vertical arrows below the timeline. Above (or below) each vertical arrow, the value of the inventory transaction is specified in the format Quantity@Unit price. An inventory transaction value surrounded by brackets indicates that the inventory transaction is physically posted into inventory. An inventory transaction value without brackets indicates that the inventory transaction is financially posted into inventory. Each new receipt or issue transaction is designated with a new label. Each vertical arrow is labelled with a sequential identifier, such as 1a. The identifiers indicate the sequence of inventory transaction postings in the timeline. Inventory closings are represented by a red vertical dashed line and the label Inventory Close. Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue. LIFO Date with Marking
2.3.3
Marking is process in Microsoft Dynamics AX that allows you to link, or mark, an issue transaction to a receipt transaction. Marking can occur either before or after a transaction is posted. You can use marking when you want to be sure of the exact cost of the inventory when the transaction is posted or when the inventory close is performed. For example, suppose the Customer Service department accepted a rush order from an important customer. Because this is a rush order, you will have to pay more for this item to accommodate your customer's request. You would like to be certain the cost of this
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inventory item is reflected in the margin or cost of goods sold (COGS), for this sales order invoice. When the purchase order is posted, the inventory is received at a cost of USD 120.00. If this sales order document is marked to the purchase order before the packing slip or invoice is posted, the COGS will be USD 120.00 instead of the current running average cost for the item. If the sales order packing slip or invoice is posted before the marking occurs, the COGS will be posted at the running average cost price. Before Inventory close is performed these two transactions can still be marked to each other. When a receipt transaction is marked to an issue transaction, the valuation method defined in the item's inventory model group will be disregarded and Microsoft Dynamics AX will settle these transactions to each other. To mark an issue transaction to a receipt before the transaction is posted, open the Sales order form, select a transaction line, and then click the Inventory button on the transaction line and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. To mark an issue transaction to a receipt after the transaction has been posted, navigate to the inventory item on the Transactions on Item form and click the Transaction button. Select the issue transaction that you want to mark, and then click the Inventory button and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. 1b. Inventory financial receipt for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt for a quantity of 1 at a cost of USD 20.00 each. 2b. Inventory financial receipt for a quantity of 1 at a cost of USD 20.00 each. 3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical receipt for a quantity of 1 at a cost of USD 30.00 each. 4b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each. 5a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each (running average of financial and physical updated transactions). 5b. Inventory financial issue for a quantity of 1 is marked to the inventory receipt 2b before the transaction is posted. This transaction is posted with a cost price of USD 20.00 each. 6a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each. 7. Inventory close is performed. Since the financially updated FIFO transaction is marked to an existing receipt, these transactions are settled to each other and no adjustment is made.
The new running average cost price reflects the average of the financially and physically updated transactions at USD 27.50. The following diagram illustrates this series of transactions with the effects of choosing the LIFO inventory model with marking between issues and receipts.
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Key to diagram
Inventory transactions are represented by vertical arrows. Receipts into inventory are represented by vertical arrows above the timeline. Issues out of inventory are represented by vertical arrows below the timeline. Above (or below) each vertical arrow, the value of the inventory transaction is specified in the format Quantity@Unit price. An inventory transaction value surrounded by brackets indicates that the inventory transaction is physically posted into inventory. An inventory transaction value without brackets indicates that the inventory transaction is financially posted into inventory. Each new receipt or issue transaction is designated with a new label. Each vertical arrow is labeled with a sequential identifier, such as 1a. The identifiers indicate the sequence of inventory transaction postings in the timeline. Inventory closings are represented by a red vertical dashed line and the label Inventory Close. Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue.
Weighted average is an inventory model based on the weighted average principle, where issues from inventory are valued at the average value of the items that are received into inventory during the inventory closing period, plus any on-hand inventory from the previous period. When you run an inventory closing, all receipts are settled against a virtual issue, which holds the total received quantity and value. This virtual issue has a corresponding virtual receipt from which the issues are settled. In this way, all issues get the same average cost. The virtual issue and receipt can be seen as a virtual transfer, called the weighted average inventory closing transfer. If there is only one receipt, all issues can be settled from it and the virtual transfer will not be created. When using weighted average, you can choose to mark inventory transactions so that a specific item receipt is settled against a specific issue, instead of using the weighted average rule.
We recommend a monthly inventory closing when you use the weighted average inventory model.
In Microsoft Dynamics AX, the weighted average inventory costing method is calculated by the following formula:
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Weighted average = (Q1*P1 + Q2*P2 + Qn*Pn) / (Q1 + Q2 + Qn)
Inventory transactions leaving the inventory issues, including sales orders, inventory journals, purchase credit notes, and production orders, will take place at an estimated cost price on the date of posting. This estimated cost price is also referred to as running average. At the time of inventory close, Microsoft Dynamics AX will analyze the inventory transactions for previous and current periods and determine which of the following closing principles should be used. Direct settlement Summarised settlement
Settlements are inventory close postings that adjust the issues to the correct weighted average as of the closing date. The following examples illustrate the impact of using weighted average with five different configurations: Weighted Weighted option Weighted Weighted Weighted average direct settlement without the Include physical value option average summarised settlement without the Include physical value average direct settlement with the Include physical value option average summarised settlement with the Include physical value option average with marking
The direct settlement principle used in this version of Microsoft Dynamics AX is the same used for weighted average in previous versions. The system will settle directly between receipts and issues. Microsoft Dynamics AX uses this direct settlement principle in certain specific situations: One receipt and one or several issues has been posted in the period Only issues have been posted in the period and the inventory contains on-hand items from a previous closing
In the scenario below, a financially updated receipt and issue have been posted. During inventory close, Microsoft Dynamics AX will settle the receipt directly against the issue, and no adjustment to the cost price is needed on issue. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt updated for a quantity of 5 at USD 10.00 each 1b. Inventory financial receipt updated for a quantity of 5 at USD 10.00 each 2a. Inventory physical issue updated for a quantity of 2 at USD 10.00 each 2b. Inventory financial issue updated for a quantity of 2 at USD 10.00 each 3. Inventory close is performed using the direct settlement method to settle the inventory financial receipt to the inventory financial issue.
The following diagram illustrates this series of transactions with the effects of choosing the Weighted average inventory model and the direct settlement principle without the Include physical value option.
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Key to diagram
In this version of Microsoft Dynamics AX, a new settlement principle has been introduced for weighted average based on the principle that all receipts within in a closing period are summarised into a new inventory transfer transaction called Weighted average inventory closing. All the receipts for the period will be settled against the issue of the newly created inventory transfer transaction. All issues for the period will be settled against the receipt of the new inventory transfer transaction. If the on-hand inventory is positive after the inventory close, that on-hand inventory and value of the inventory are summarised on the new inventory transfer transaction (receipt). If the inventory on-hand is negative after the inventory close, the on-hand inventory and value of the inventory is the sum of individual issues that have not been fully settled. In the scenario below, several financially updated receipts and one issue have been posted. During inventory close, Microsoft Dynamics AX will generate and post the summarised inventory transfer transaction in order to settle all the receipts for the period against the summarised inventory transfer issue transaction. All the issues posted for the period will be settled against the summarized inventory transfer receipt transaction. The weighted average is calculated to be USD 15.00.
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Because the issue was originally posted with an estimated cost price of USD 14.67, an adjustment of negative USD 0.33 will be created and posted on the issue. As of the inventory closing date, the on-hand inventory is 3 pieces with a value of USD 45.00. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt updated for a quantity of 2 at a cost of USD 11.00 each. 1b. Inventory financial receipt updated for a quantity of 2 at a cost of USD 14.00 each. 2a. Inventory physical receipt updated for a quantity of 1 at a cost of USD 12.00 each. 2b. Inventory financial receipt updated for a quantity of 1 at a cost of USD 16.00 each. 3a. Inventory physical issue updated for a quantity of 1 at a cost of USD 14.67 each (running average). 3b. Inventory financial issue updated for a quantity of 1 at a cost of USD 14.67 each (running average). 4a. Inventory physical receipt updated for a quantity of 1 at a cost of USD 14.00 each. 4b. Inventory financial receipt updated for a quantity of 1 at a cost of USD 16.00 each. 5. Inventory close is performed. 6a. "Weighted average inventory close transaction" financial issue is created to sum the settlements of all the inventory financial receipts. 6b. "Weighted average inventory close transaction" financial receipt is created as the offset to 5a.
The following diagram illustrates this series of transactions with the effects of choosing the Weighted average inventory model and the summarised settlement principle without the Include physical value option.
Key to diagram
Inventory transactions are represented by vertical arrows. Receipts into inventory are represented by vertical arrows above the timeline. Issues out of inventory are represented by vertical arrows below the timeline. Above (or below) each vertical arrow, the value of the inventory transaction is specified in the format Quantity@Unit price. An inventory transaction value surrounded by brackets indicates that the inventory transaction is physically posted into inventory. An inventory transaction value without brackets indicates that the inventory transaction is financially posted into inventory.
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Each new receipt or issue transaction is designated with a new label. Each vertical arrow is labelled with a sequential identifier, such as 1a. The identifiers indicate the sequence of inventory transaction postings in the timeline. Inventory closings are represented by a red vertical dashed line and the label Inventory Close. Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue. Red arrows illustrate the receipt transactions being settled to the issue transaction created by the system. The green arrow represents the offsetting system-generated receipt transaction to which the originally posted issue transaction is settled
In this version of Microsoft Dynamics AX, the parameter Include physical value works differently with the weighted average inventory model than in previous versions of the product. If the Include physical value box is selected for an item in the Inventory model group form, Microsoft Dynamics AX will use physically updated receipts when calculating the estimated cost price, or running average. Issues will be posted based on this estimated cost price during the period. During the inventory close, financially updated receipts only will be considered in the weighted average calculation. We recommend a monthly inventory close when you use the weighted average inventory model. In this weighted average direct settlement example, the inventory model group is marked to include physical value. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt updated for a quantity of 1 at a cost of USD 11.00 each. 1b. Inventory financial receipt updated for a quantity of 1 at a cost of USD 10.00 each. 2a. Inventory physical receipt updated for a quantity of 1 at a cost of USD 15.00 each. 3a. Inventory physical issue updated for a quantity of 1 at a cost of USD 12.50 each (running average cost, since the physical receipt value is taken into consideration). 3b. Inventory financial issue updated for a quantity of 1 at a cost of USD 12.50 each (running average cost, since the physical receipt value is taken into consideration). 4. Inventory close is performed. During inventory close, Microsoft Dynamics AX will disregard all inventory transactions that have been only physically updated. Instead, the direct settlement principle will be used because only one financial receipt exists. An adjustment of USD 2.50 will be posted to the inventory transaction that has been financially issued as of the inventory closing date. After inventory close, the on hand inventory will be a quantity of 1 with a running average cost price of USD 15.00.
The following diagram illustrates this series of transactions with the effects of choosing the Weighted average inventory model and the direct settlement principle with the Include physical value option.
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Key to diagram
In this version of Microsoft Dynamics AX, the Include physical value parameter works differently with weighted average than in previous versions of the program. If the Include physical value box is selected for an item in the Inventory model group form, Microsoft Dynamics AX will use physically updated receipts in the calculation of estimated cost price, or running average. Issues will be posted based on this estimated cost price during the period. During the inventory close financially updated receipts only will be considered in the weighted average calculation. We recommend a monthly inventory close when you use the weighted average inventory model. In this weighted average summarised settlement example, the inventory model is marked to include physical value. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt updated for a quantity of 2 at a cost of USD 11.00 each. 1b. Inventory financial receipt updated for a quantity of 2 at a cost of USD 14.00 each. 2. Inventory physical receipt updated for a quantity of 1 at a cost of USD 10.00 each.
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3a. Inventory physical receipt updated for a quantity of 1 at a cost of USD 12.00 each. 3b. Inventory financial receipt updated for a quantity of 1 at a cost of USD 16.00 each. 4a. Inventory physical issue updated for a quantity of 1 at a cost of USD 13.50 each (running average cost, since the physical receipt value is taken into consideration). 4b. Inventory financial issue updated for a quantity of 1 at a cost of USD 13.50 each (running average cost, since the physical receipt value is taken into consideration). 5a. Inventory physical receipt updated for a quantity of 1 at a cost of USD 14.00 each. 5b. Inventory financial receipt updated for a quantity of 1 at a cost of USD 16.00 each. 6.Inventory close is performed. During inventory close, Microsoft Dynamics AX will disregard all inventory transactions that are updated only physically. The summarized settlement principle will be used because only one financial receipt exists. An adjustment of USD 1.50 will be posted to the inventory transaction that has been financially issued as of the inventory closing date. After inventory close, the on- hand inventory will be a quantity of 3 with a running average cost price of USD 15.00. 7a. "Weighted average inventory close transaction" financial issue is created to sum the settlements of all the inventory financial receipts. 7b. "Weighted average inventory close transaction" financial receipt is created as the offset to 5a.
The following diagram illustrates this series of transactions with the effects of choosing the weighted average inventory model and the summarised settlement principle without the Include physical value option.
Key to diagram
Inventory transactions are represented by vertical arrows. Receipts into inventory are represented by vertical arrows above the timeline. Issues out of inventory are represented by vertical arrows below the timeline. Above (or below) each vertical arrow, the value of the inventory transaction is specified in the format Quantity@Unit price. An inventory transaction value surrounded by brackets indicates that the inventory transaction is physically posted into inventory. An inventory transaction value without brackets indicates that the inventory transaction is financially posted into inventory. Each new receipt or issue transaction is designated with a new label.
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Each vertical arrow is labelled with a sequential identifier, such as 1a. The identifiers indicate the sequence of inventory transaction postings in the timeline. Inventory closings are represented by a red vertical dashed line and the label Inventory Close. Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue. Red arrows illustrate the receipt transactions being settled to the issue transaction created by the system. The green arrow represents the offsetting system-generated receipt transaction to which the originally posted issue transaction is settled
Marking is a process in Microsoft Dynamics AX that allows you to link, or mark, an issue transaction to a receipt transaction. Marking can occur either before or after a transaction is posted. You can use marking when you want to be sure of the exact cost of the inventory when the transaction is posted or when the inventory close is performed. For example, your Customer Service department accepted a rush order from an important customer. Because this is a rush order, you will have to pay more for this item to accommodate your customer's request. You would like to be certain the cost of this inventory item is reflected in the margin, or cost of goods sold (COGS), for this sales order invoice. When the purchase order is posted, the inventory is received at a cost of USD 120.00. If this sales order document is marked to the purchase order before the packing slip or invoice is posted, the COGS will be USD 120.00 instead of the current running average cost for the item. If the sales order packing slip or invoice is posted before the marking occurs, the COGS will be posted at the running average cost price. Before inventory close is performed, these two transactions can still be marked to each other. When a receipt transaction is marked to an issue transaction, the valuation method selected for the item's inventory model group will be disregarded and Microsoft Dynamics AX will settle these transactions to each other. To mark an issue transaction to a receipt before the transaction is posted, open the Sales order form, select a transaction line, and then click the Inventory button on the transaction line and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. To mark an issue transaction to a receipt after the transaction has been posted, navigate to the inventory item on the Transactions on Item form and click the Transaction button. Select the issue transaction that you want to mark, and then click the Inventory button and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. The following transactions are illustrated in the graphic below: 1a. 1b. 2a. 2b. Inventory Inventory Inventory Inventory physical receipt for a quantity of 1 at a cost of USD 10.00 each. financial receipt for a quantity of 1 at a cost of USD 10.00 each. physical receipt for a quantity of 1 at a cost of USD 20.00 each. financial receipt for a quantity of 1 at a cost of USD 20.00 each.
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3a. Inventory physical receipt for a quantity of 1 at a cost of USD 25.00 each. 4a. Inventory physical receipt for a quantity of 1 at a cost of USD 30.00 each. 4b. Inventory financial receipt for a quantity of 1 at a cost of USD 30.00 each. 5a. Inventory physical issue for a quantity of 1 at a cost price USD 21.25 (running average of financial and physical updated transactions). 5b. Inventory financial issue for a quantity of 1 is marked to the inventory receipt 2b before the transaction is posted. This transaction is posted with a cost price of USD 20.00. 6a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 each. 7 Inventory close is performed. Since the financially updated transaction is marked to an existing receipt these transactions are settled to each other and no adjustment is made.
The new running average cost price reflects the average of the financially and physically updated transactions at USD 27.50. The following diagram illustrates this series of transactions with the effects of choosing the Weighted average inventory model with marking.
Key to diagram
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2.4
About Weighted Average Date
Weighted average date is an inventory model based on the weighted average principle, where issues from inventory are valued at the average value of the items that are received into inventory for each separate day in the inventory closing period. When you run an inventory closing with weighted average date, all receipts for a day are settled against a virtual issue, which holds the total received quantity and value for that day. This virtual issue has a corresponding virtual receipt from which the issues will be settled. In this way, all issues get the same average cost. The virtual issue and receipt can be seen as a virtual transfer, called the weighted average inventory closing transfer". If only one receipt has occurred on or before the date, it is not necessary to value the average because all issues are settled from it and the virtual transfer will not be created. Likewise, if only issues occur on the date, there are no receipts from which to value the average, and the virtual transfer will not be created in this case either. When using weighted average date, you can choose to mark inventory transactions so that a specific item receipt is settled against a specific issue, instead of using the weighted average date rule.
We recommend a monthly inventory closing when you use the weighted average date inventory model.
In Microsoft Dynamics AX, weighted average date the inventory costing method is calculated by the following formula: Weighted average = (Q1*P1 + Q2*P2 + Qn*Pn) / (Q1 + Q2 + Qn)
During inventory close, the calculation will be executed on a daily basis through the closing period as illustrated in the following graphic.
Inventory transactions leaving the inventory, including sales orders, inventory journals, purchase credit notes, and production orders, will take place at an estimated cost price on the date of posting. This estimated cost price is also referred to as the running average cost price On the date of inventory close, Microsoft Dynamics AX will analyze the inventory transactions for previous periods, previous days, and the current day to determine which of the following closing principles should be used:
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Direct settlement Summarised settlement Settlements are inventory close postings that adjust the issues to the correct weighted average as of the closing date. The following examples illustrate the impact of using weighted average with five different configurations: Weighted option Weighted option Weighted Weighted option Weighted average date direct settlement without the Include physical value average date summarized settlement without the Include physical value average date direct settlement with the Include physical value option average date summarized settlement with the Include physical value average date with marking
The direct settlement principle used in this version of Microsoft Dynamics AX is the same used for weighted average in previous versions of the product. The system will settle directly between receipts and issues. Microsoft Dynamics AX uses this direct settlement principle in certain specific situations: One receipt and one or several issues has been posted in the period Only issues have been posted in the period and the inventory contains on-hand items from a previous closing
In the scenario below, a financially updated receipt and issue have been posted. During inventory close, Microsoft Dynamics AX will settle the receipt directly against the issue, and no adjustment to the cost price is needed on issue. The following transactions are illustrated in the graphic below: 1a. Inventory physical receipt updated for a quantity of 5 at a cost of USD 10.00 each 1b. Inventory financial receipt updated for a quantity of 5 at a cost of USD 10.00 each 2a. Inventory physical issue updated for a quantity of 2 at a cost of USD 10.00 each 2b. Inventory financial issue updated for a quantity of 2 at a cost of USD 10.00 each 3. Inventory close was performed using the direct settlement method to settle the inventory financial receipt to the inventory financial issue.
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Key to diagram
If the on-hand inventory is positive after the inventory close, that on-hand inventory and value of the inventory are summarised on the new inventory transfer transaction (receipt). If the inventory on-hand is negative after the inventory close, the on-hand inventory and value of the inventory is the sum of individual issues that have not been fully settled. In the scenario below, several financially updated receipts and issues have been posted during the period. During inventory close, Microsoft Dynamics AX will evaluate every day to determine how each one should be treated by closing. The following are illustrated in the graph below: DAY 1: 1a. Inventory 1b. Inventory 2a. Inventory 15.00. 2b. Inventory 15.00. physical receipt updated for a quantity of 3 at USD 15.00 each. financial receipt updated for a quantity of 3 at USD 15.00 each. physical issue for a quantity of 1 at a running average cost of USD financial issue for a quantity of 1 at a running average cost of USD
The system will use the direct settlement approach for Day 1.
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DAY 2: 3a. Inventory physical issue for a quantity of 1 at a running average cost of USD 15.00. 3b. Inventory financial issue for a quantity of 1 at a running average cost of USD 15.00.
The system will use the direct settlement approach for Day 2. DAY 3: 4a. Inventory 15.00. 4b. Inventory 15.00. 5a. Inventory 5b. Inventory physical issue for a quantity of 1 at a running average cost of USD financial issue for a quantity of 1 at a running average cost of USD physical receipt for a quantity of 1 at USD 17.00 each. financial receipt for a quantity of 1 at USD 17.00 each.
Inventory close is performed. The direct settlement will need to be used because there are multiple receipts crossing multiple days. 7a. A weighted average inventory close transaction financial issue is created at for a quantity of 2 at USD 32.00 to summarize the settlements of all inventory financial receipts to date that have not been closed. 7b. A weighted average inventory close transaction financial receipt is created as the offset to 7a.
Microsoft Dynamics AX will generate and post the summarised inventory transfer transaction and settle all the receipts for the day and on-hand inventory for previous days against the summarised inventory transfer issue transaction. All the issues for the day will be settled against the summarised inventory transfer receipt transaction. The weighted average cost price is calculated to be USD 16.00. The issue will have an adjustment of USD 1.00 to adjust to the weighted average cost. The new running average cost price is USD 16.00. The following diagram illustrates this series of transactions with the effects of choosing the Weighted average inventory model and the summarised settlement principle without the Include physical value option.
Key to diagram
Inventory transactions are represented by vertical arrows. Receipts into inventory are represented by vertical arrows above the timeline. Issues out of inventory are represented by vertical arrows below the timeline.
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Above (or below) each vertical arrow, the value of the inventory transaction is specified in the format Quantity@Unit price. An inventory transaction value surrounded by brackets indicates that the inventory transaction is physically posted into inventory. An inventory transaction value without brackets indicates that the inventory transaction is financially posted into inventory. Each new receipt or issue transaction is designated with a new label. Each vertical arrow is labelled with a sequential identifier, such as 1a. The identifiers indicate the sequence of inventory transaction postings in the timeline. Inventory closings are represented by a red vertical dashed line and the label Inventory Close. Settlements that are performed by inventory close are represented by dotted red arrows going diagonally from a receipt to an issue. Red diagonal arrows illustrate the receipt transactions being settled to the issue transaction created by the system. The green diagonal arrow represents the offsetting system-generated receipt transaction to which the originally posted issue transaction is settled.
The direct settlement principle used for weighted average date in this version of Microsoft Dynamics AX is the same as used in previous versions. The system will settle directly between receipts and issues. Microsoft Dynamics AX uses this direct settlement principle in certain specific situations: One receipt and one or several issues has been posted in the period Only issues have been posted in the period and the inventory holds an on-hand inventory from a previous closing
In this version of Microsoft Dynamics AX, the parameter Include physical value works differently with the weighted average date inventory model than in previous versions of the product. If the Include physical value box is selected for an item in the Inventory model group form, Microsoft Dynamics AX will use physically updated receipts when calculating the estimated cost price, or running average. Issues will be posted based on this estimated cost price during the period. During the inventory close, financially updated receipts only will be considered in the weighted average calculation. In this version of Microsoft Dynamics AX, the parameter Include physical value works differently with the weighted average date inventory model than in previous versions of the product. If the Include physical value box is selected for an item in the Inventory model group form, Microsoft Dynamics AX will use physically updated receipts when calculating the estimated cost price, or running average. Issues will be posted based on this estimated cost price during the period. During the inventory close, financially updated receipts only will be considered in the weighted average calculation. In this version of Microsoft Dynamics AX, a new settlement principle has been introduced for weighted average based on the principle that all receipts within in a closing period are summarised into a new inventory transfer transaction called Weighted average inventory closing. All the receipts for the day will be settled against the issue of the newly created inventory transfer transaction. All issues for the day will be settled against the receipt of the new inventory transfer transaction.
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If the on-hand inventory is positive after the inventory close, that on-hand inventory and value of the inventory are summarised on the new inventory transfer transaction (receipt). If the inventory on-hand is negative after the inventory close, the on-hand inventory and value of the inventory is the sum of individual issues that have not been fully settled. Marking is a process in Microsoft Dynamics AX that allows you to link, or mark, an issue transaction to a receipt transaction. Marking can occur either before or after a transaction is posted. You can use marking when you want to be sure of the exact cost of the inventory when the transaction is posted or when the inventory close is performed. For example, your Customer Service department accepted a rush order from an important customer. Because this is a rush order, you will have to pay more for this item to accommodate your customer's request. You would like to be certain the cost of this inventory item is reflected in the margin, or cost of goods sold (COGS), for this sales order invoice. When the purchase order is posted, the inventory is received at a cost of USD 120.00. If this sales order document is marked to the purchase order before the packing slip or invoice is posted, the COGS will be USD 120.00 instead of the current running average cost for the item. If the sales order packing slip or invoice is posted before the marking occurs, the COGS will be posted at the running average cost price. Before inventory close is performed, these two transactions can still be marked to each other. When a receipt transaction is marked to an issue transaction, the valuation method defined in the item's inventory model group will be disregarded and Microsoft Dynamics AX will settle these transactions to each other. To mark an issue transaction to a receipt before the transaction is posted, open the Sales order form, select a transaction line, and then click the Inventory button on the transaction line and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. To mark an issue transaction to a receipt after the transaction has been posted, navigate to the inventory item on the Transactions on Item form and click the Transaction button. Select the issue transaction that you want to mark, and then click the Inventory button and select Marking. The Marking form will open and display all the open receipt transactions. You can then select one of these transactions to match to, or mark, this issue transaction. The following transactions are illustrated in the graphic below: 1a. Inventory each. 1b. Inventory each. 2a. Inventory each. 2b. Inventory each. physical receipt for a quantity of 1 at a cost price of USD 10.00 financial receipt for a quantity of 1 at a cost price of USD 10.00 physical receipt for a quantity of 1 at a cost price of USD 20.00 financial receipt for a quantity of 1 at a cost price of USD 20.00
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3a. Inventory physical receipt for a quantity of 1 at a cost price of USD 25.00 each. 4a. Inventory physical receipt for a quantity of 1 at a cost price of USD 30.00 each. 4b. Inventory financial receipt for a quantity of 1 at a cost price of USD 30.00 each. 5a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25 (running average of financial and physical updated transactions). 5b. Inventory financial issue for a quantity of 1 is marked to the inventory receipt 2b before the transaction is posted. This transaction is posted at a cost price of USD 20.00. 6a. Inventory physical issue for a quantity of 1 at a cost price of USD 21.25. 7. Inventory close is performed. Because the financially updated transaction is marked to an existing receipt, these transactions are settled to each other and no adjustment is made.
The new running average cost price reflects the average of the financially and physically updated transactions at USD 27.50. The following diagram illustrates this series of transactions with the effects of choosing the Weighted average date inventory model with marking.
Key to diagram
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2.5
Prerequisites for Standard Costs
This topic covers the basic steps for using standard costs. Subsequent steps depend on the company's operations, such as a nonmanufacturing environment, a manufacturing environment without routings, and a manufacturing environment with routings. To set up standard costs, follow these steps: 1. Create an inventory model group for standard costs. Use the Inventory model groups form to create a new group for standard costs and to assign an inventory model of Standard cost. The identifier for the inventory model group should be meaningful, such as Std Cost. Select the check boxes to indicate that the group should allow financial negative inventory, post physical inventory, and post financial inventory. This standard cost group will be assigned to items. 2. Define ledger accounts that are related to standard cost variances. Use the Chart of Account Details form to define ledger accounts that are related to standard cost variances. These ledger accounts must be defined before they can be assigned in the Posting form. The ledger accounts can reflect item groups and cost groups. 3. Assign ledger accounts to inventory postings that are related to standard cost variances. Use the Posting form to assign the ledger accounts that are related to standard cost variances. You can choose whether to specify a variance's ledger account by item (or item group) and by cost group (or cost group type), or to specify that the ledger account applies to all items and all cost groups. These choices correspond to cost relations for tables, groups, and all. Use the Transaction combinations form to enable the use of cost relations (for tables, groups, and all) before you define the inventory posting rules. 4. Define inventory parameters that are related to standard costs. Use the Inventory parameters form to define cost control parameters (on the Bills of materials tab) to define two parameters that are related to standard costs. Use the Cost breakdown field to select No or Sub ledger. The selection of Sub ledger is termed an active cost breakdown. An active cost breakdown is critical for calculating, retaining and viewing cost group segmentation across a multilevel product structure for standard cost items. When the cost breakdown is active, you can report and analyze inventory, work in process (WIP), and cost of goods sold (COGS) per cost group in a single level, multilevel or total format. An active cost breakdown means that activating a manufactured item's cost will result in storing the cost group segmentation within the item's cost record. The selection of none for the Cost breakdown field means that cost group segmentation will not be maintained for standard cost items. That is, a manufactured item's standard cost will be calculated and maintained as a
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single amount without cost group segmentation, and the cost contributions of manufactured components will be aggregated into the single amount. Use the Variances to Standard field to select summarized or per cost group. The selection of per cost group enables you to identify purchase price variances and production variances by cost group, and also identify the four types of production variances (the lot size, quantity, price and substitution variances). The selection of summarized means that you cannot identify variances by cost group, and you cannot identify the four types of production variances. You can only view a summarized production variance. The policy about variance to standard works independently of the cost breakdown policy. That is, you can select a cost breakdown policy of none, and select variances per cost group, so that production variances by cost group will still be captured. 5. Create costing versions for standard costs. Use the Costing version setup form to create one or more costing versions for standard costs. Each costing version must be designated with a costing type of standard costs and allow content to include cost data. 6. Prepare an existing Microsoft Dynamics AX customer to use standard costs. Customers who are using an earlier version of Microsoft Dynamics AX must use the Multisite Activation Wizard, because the standard cost functionality requires multisite functionality. Standard costs are site-specific. The wizard identifies the steps that must be completed in order to enable multisite functionality. Customers who want to change their existing items to a standard cost inventory model must use the Standard cost conversions form.
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3 Inventory Model Groups

Inventory management > Setup > Inventory > Inventory model groups Use this form to create and maintain inventory model groups. Inventory model groups contain settings that determine how items are controlled and handled on item receipts and issues. They also determine how item consumption is calculated. A model group can be associated with many items. This facilitates maintenance, since many items are often controlled with the same setup.
4 Tabs
The following tables provide descriptions for the controls in this form: Tab Overview tab General tab Setup tab Description View a list of Inventory model groups or create new ones. View one specific Inventory model group or create a new one. Set up and maintain parameters for the selected Inventory model group. Select inventory model.
Inventory model
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4.1
Field
Overview & General Tabs

Description Identification for the inventory model group. Descriptive name for the inventory model group.
Inventory model group Name
4.2 4.2.1
Field
Setup Tab Negative Stock

Description If selected, negative physical inventory is allowed for the inventory model group. Microsoft Dynamics AX does not check whether items are physically in inventory when items are being picked. Example
Production is started, but not all items for the production are in inventory. The items have been ordered and delivery has been scheduled. Alternatively, an order for an item is updated, and even though the item is not in inventory, it has been purchased and will soon be in inventory.
Physical negative inventory
Financial negative inventory
If selected, negative financial inventory is allowed for the inventory model group. Negative financial inventory is often used for services. If the check box is cleared, the cost price must be known for the quantity that is being financially pulled from inventory. Example
Eight items are invoice updated, and another five are packing-slip updated, making the physical on-hand inventory 13. When financial negative inventory is not allowed (the check box is cleared), only eight are available for the invoice updating of a sales order, even though 13 are physically available in inventory.
4.3 4.3.1
Field
Setup Tab Warehouse Management

Description If selected, indicates that items attached to this group are under quarantine management rules and requirements. This is used for items that are set aside and awaiting approval for distribution. If the check box is cleared, items are not under quarantine management unless a quarantine order is created manually in Quarantine orders. When the item is registered, a quarantine order is generated with the status Started.
Quarantine management
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4.4 4.4.1
Field
Setup Tab Ledger Integration

Description If selected, physical item transactions are posted in the ledger. If the check box is selected, physical item transactions are posted in the ledger in the following manner: Packing slip is posted if Post packing slip in ledger is selected in Purchase or Sales order parameters or both. Report as finished is posted if Post report as finished in ledger is selected in Production orders parameters.
Post physical inventory
If the check box is cleared, Packing slip and Report as finished are not posted in the ledger, regardless of the setup that is selected in the Purchase, Sales, or Production orders parameters or in all three parameters. Post financial inventory If the check box is selected it Posts the updated financial value of items in the ledger. When a purchase order is invoice-updated, the value of the items is posted to the inventory receipt account. When a sales order is invoice-updated, the value of the items is posted to the inventory issue and consumption accounts. The posted inventory value can then be easily reconciled with the related status accounts in the General ledger module. If the check box is cleared, purchases are posted to the item consumption account when the purchase is invoice updated. No posting takes place in the inventory receipt account when purchases are invoice updated. Likewise, no posting occurs in the item consumption account, or the issue account when sales orders are invoice updated.
Note
If item consumption (COGS) should not be posted when Sales Orders are invoiced, leave the check box cleared for groups that are associated with SERVICE ITEMS.
When they are left blank, lines in the Movement and Profit/Loss inventory journals do not generate ledger postings.
Post physical revenue
If selected, estimated Revenue or Turnover in connection with Delivery Note updates is posted in the ledger. Balance can figure both a realised, and an expected contribution margin. If selected it posts the Estimated Purchase in connection with Delivery Note updates to the General Ledger module.
Post physical purchase
4.5 4.5.1
Field
Setup Tab Physical Update

Description
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Registration requirements
Select whether item receipts must be registered before inventory is physically updated. When selected, the status of the item receipt inventory transaction must be Registered before the item's Delivery Note is updated. This field is generally used with Warehouse Management. Registered items are part of physical inventory. You can register items in the Warehouse management journals, or by clicking Inventory, then Registration on the relevant journals and orders.
Picking requirements
When selected, item issues must be picked before inventory is physically updated. The item issue inventory transactions must have the status Picked before the Delivery Note is updated. This procedure is generally used with Warehouse Management. Picked items are a part of physical inventory. Items can be picked in the Warehouse Management system with dispatches and picking routes, or they can be picked by clicking Inventory and then Registration on the relevant journals and orders.
Note If you create a direct delivery from a sales order, then the Picking requirements parameter is ignored because items are transferred directly from the vendor to the customer without ever physically coming into your company.
Receiving requirements
When selected, Item Receipts must be Physically updated before they can be Financially updated. A Delivery note must be entered and posted before the corresponding Vendor Invoice can be posted. If there is a difference between the received quantity on the Delivery Note and the Invoiced quantity on the Invoice, an icon is shown in the Delivery Note quantity match column in the Posting invoice form (Accounts payable > Periodic > Purchase order
update > Invoice).
Deduction requirements
When selected, Item Deductions must be Physically updated before they can be Financially updated. A Delivery Note must be entered and posted before the corresponding Vendor Invoice can be posted. If there is a difference between the deducted quantity on the Delivery Note and the negative Invoiced quantity on the Invoice, an icon is shown in the Delivery Note quantity match column in the Posting invoice form (Accounts payable > Periodic > Purchase order
update > Invoice).
4.6 4.6.1
Field
Setup Tab Reservation

Description If Selected it activates Date-controlled Reservation. Select if you want the date of receipt of items to be taken into consideration when reserving items. If the check box is cleared, available
Datecontrolled
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inventory with the lowest batch number is reserved. Backward from ship date Executes Reservation backwards from the Delivery date. Select this check box if you want to Reserve available inventory batches with the date of receipt that is nearest to the sales order delivery date. If the check box is cleared, available inventory batches with the first date of receipt are reserved.
Note Backward from ship date first reserves items that are available on inventory. If no items are available on inventory, it reserves upon purchase order lines with the date of receipt that is nearest to the sales order delivery date.
4.7 4.7.1
Field
Stock Model Tab Stock Model

Description Select from FIFO, LIFO, LIFO date, Weighted av., Weighted avg. Date, Standard cost
Stock Model
4.8 4.8.1
Field
Stock Model Tab Cost Price

Description If selected, Physically updated transactions are included in the calculation of the Average Cost. At Inventory Closing the parameter will be considered according to the inventory valuation method. The following inventory valuation methods will consider the parameter during inventory close: FIFO LIFO LIFO date
Include physical value
The following inventory valuation methods will NOT consider the parameter during inventory close: Fixed receipt price Weighted avg. Weighted avg. date
Adjusts Item Receipt and Issue values to the Fixed Receipt Price in the Item table when posted. If the Receipt price is different from the Fixed Receipt price, inventory is updated with the Fixed Receipt price, and the difference is posted to the account for Fixed Receipt price Loss or Profit. Items are posted at the Current receipt price. Upon Closing, Issue transactions are value-adjusted according to the Inventory Model groups that are selected in Inventory model group.
5 End of Document
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AX2009 - Fact Sheet - Inventory Closing - Average Cost Price - Inventory Model Groups v1.0

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1 About Average Cost Price

Estimated running average cost price

Cost price defined on the item master

Specify an Inventory Model for Inventory Close

LIFO with the Include Physical value

About LIFO Date

Weighted average = (Q1*P1 + Q2*P2 + Qn*Pn) / (Q1 + Q2 + Qn)

About Weighted Average Date

Prerequisites for Standard Costs

3 Inventory Model Groups

Overview & General Tabs

Inventory model group Name

Setup Tab Negative Stock

Physical negative inventory

Financial negative inventory

Setup Tab Warehouse Management

Setup Tab Ledger Integration

Post physical inventory

Post physical revenue

Post physical purchase

Setup Tab Physical Update

Setup Tab Reservation

Stock Model Tab Stock Model

Stock Model Tab Cost Price

Include physical value

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Weighted average = (Q1P1 + Q2P2 + Qn*Pn) / (Q1 + Q2 + Qn)