MTS #04E – Inventory Internal Transfer Cost Value Calculations

SMARTSystem Management Training Series
Training Session #4E – SMARTSystem Inventory Internal Transfer Cost Value Calculations

Purpose:   The purpose of this document is to define how the cost values are calculated during both a straight transfer and a consolidation transfer. This document will cover the calculations used for WAC and WAC2 and Non-WAC transactions.

Definitions:  The following is a list of key terms used in the SMARTSystem that you should be familiar with and understand.

• WAC – Is an acronym meaning Weighted Average Cost. There are several different ways of calculating WAC and we call them WAC1 and WAC2.
• WAC 1– Will re-compute a new WAC value based on all open inventory lots:
  • The value of all open lots is computed and divided by the total number of units on open lots to determine the current WAC.
  • For any product when inventory goes to zero, the Average Landed Cost is also set to zero and the WAC calculations start over.
  • The calculated WAC value is stored in the Average Landed Cost field in the inventory record matching the Product Code, as shown below:

    

• WAC 2 – Utilizes the Average Landed Cost field from the Inventory Table to compute a new value based on receiving new produce:
  • Each time a new product is added to inventory the Average Landed Cost (stored in the inventory record) is multiplied by the Total Units On Hand to determine the current stock value.
  • The value of the new product (Quantity * Cost) is added and the total current value from the previous step and divided by the total number of units (On Hand + New Quantity) to determine the new WAC value.
  • The calculated WAC2 value is stored in the Average Landed Cost field in the inventory record matching the Product Code to be used the next time product is received. The Average Landed Cost does not reset when inventory is zero.

• STRAIGHT TRANSFER – A straight transfer is when one product is directly transferred to another product.

• CONSOLIDATION TRANSFER – This is the process of combining multiple products into a single product, such as a bouquet.

Overview

Transfer Cost Calculations

This section will discuss how the WAC is computed for each type of internal inventory transfer. Non-WAC or Current Landed Cost is also referenced.

Straight Transfer:

• The following procedure is followed to compute the cost of the products involved in a straight transfer:
  • The FROM Side of the transaction (reduction)
    • When WAC 1 or WAC 2 are set in System Control
      • The Average Landed Cost from the inventory record for the product code is used for the reduction adjustment
    • When WAC is NOT selected (Non-WAC)
      • Adjustment Cost = Per Unit Cost + Per Unit Freight Cost for that item or Landed Cost.
  • Then TO Side of the transaction (increase)
    • A new Receiving Lot is created (production) and an adjustment record is written
    • For WAC the Adjustment cost is set as:
      • The Average Landed Cost of the “FROM” product is used as the Cost of the TO Product to create the Receiving Lot and Adjustment Record
    • When using WAC 1
      • After the New Receiving Lot is created the function to compute the new WAC is run and the resulting new WAC value is stored in the Average Landed Cost field in the inventory record
    • When using WAC 2
      • The new WAC (computed as defined in the Definition area above) for the product code associated with the FROM record is creates the Receiving Lot and Adjustment records. This WAC value takes the newly transferred item into account.
      • The new WAC 2 value is stored in the Average LandedCost field in the inventory record

Consolidation Transfer

• When several products are used to create a bouquet the following procedure is followed to compute the cost of the products involved in a Consolidation transfer:
• The Consolidation transfer allows the user to set the quantity of TO product to create from the FROM Products
  • The FROM Side of the transaction (reduction)
    • When using WAC 2
      • The Average Landed Cost for the FROM products are used to create the Reduction Adjustment for the From Product.
        • This value is stored as Adjustment Cost to be used in the TO side of the transaction
    • When using WAC 1 or the Non-WAC option is selected
      • The landed cost of the product is used and stored as the Adjustment Cost
  • The TO side of the transaction
    • The Total Cost ([FROM Product Adjustment Costs] x[FROM Transfer Quantity]) of all of the FROM Products is collected and then divided by the Consolidation Quantity that was entered on the Consolidation confirmation screen to arrive at the cost of the TO product (see example below).
      • WAC 1, WAC 2, and Non-WAC options:
        • This cost is used to Create a receiving record and an adjustment record
      • Regardless of which WAC option is used, this new cost is stored in Inventory Record in the Current Landed Cost.
  • ForWAC 1:
    • The procedure to recalculate WAC by lots is called after the receiving lot is created and the resulting new WAC value is stored in the Average Landed Cost
  • For WAC 2:
    • The process that created the receiving record and inventory adjustment returns the WAC 2 value that is then stored in the Inventory Average Landed Cost field

WAC 2 Consolidation Transfer Example

Using the following Inventory Adjustments Report to identify products transferred which can be exported to excel, if you need more flexibility.

A Transfer works this way:  An Inventory Adjustment Record is generated from each of the FROM products and immediately after that the TO product.  I have highlighted two transfers below which gives you date, time, who did the transfer, what products, quantity were transferred, costs at the time of the transfer, and what program created the adjustment.  See the formulas for generating the TO costs.

In the 2^nd transfer creating BOUQWFSSMA the following calculations are done.

Costs are accumulated for each FROM product, accumulated and divided by the TO quantity for a new Average Landed Cost:

QTY    COST

1.     4 x   2.683   =   10.732
2.   26 x   1.881   =   48.906
3. 100 x     .302   =   30.200
4.   14 x  3.552    =   49.728
5.     2 x  3.668   =      7.336
6.     8 x  3.330   =    26.640
7.    4  x  3.931   =  15.724
8.    3  x  3.300   =      9.900
9.    7  x  3.300   =    23.100

                  Total       $  222.266

Divided the Total cost by the TO quantity of 3 products = 74.0886 for the Average Landed Cost of the new item.

Note: that the TO quantity is very important to calculate the correct Average Landed Cost.

Questions and Answers:

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