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QuickBooks Enterprise 2012: FIFO Inventory Costing - Right or Wrong?

The Advanced Inventory Add-on for QuickBooks Enterprise 2012 offers the ability to use FIFO costing instead of the average cost method historically used in all versions of QuickBooks.

So I did some investigation on this new feature to see how if/how it works and I wanted to share those results with you.

RESULTS THAT MAKE YOU GO HMMMMM.....

I used a sample QuickBooks data file for testing, as it already had some inventory parts with history associated with them.

First, I turned on the FIFO option in the Inventory Preferences (Edit > Preferences > Items and Inventory > Company Preferences > Advanced Inventory Settings). This was easy to do (under the assumption you have purchased the Advanced Inventory add-on for QuickBooks Enterprise).

Then, I ran an inventory valuation summary report right after I turned on the FIFO costing to get my baseline. Using the item called Exterior Wood Door, here is what the valuation looked like:

FIFO - Beginning 12_15_16

As of my test date (12/15/2016), we had 16 units at a cost of $308.51 each, for a total value of $4,936.10. (Note: This is the exact same as the average cost of these units just before turning on the FIFO option).

Ok, so far so good.

Then, I created a purchase order for 10 of these units at $750 each (to give us some clear distinction in costs between "old" and "new"). I dated the purchase order 12/17/2016 (which is after the "FIFO start date" in QuickBooks) and received these items into inventory on the same date.

Here is what my inventory looked like after that transaction (this is the only transaction I made):

FIFO - After PO Receipt 12_17_16

Now I have a total of 26 items at a total cost of $12,436.10. That is the original cost of $4,936.10 + the purchase cost of $7,500 (10 units @ $750/each). Note that the cost per item which is now appearing is $478.31. To me, it looks like QuickBooks has just taken then $12,436.10 and divided it by 26 units to get an average cost of $478.31 per unit.

At this point, I'm not seeing any indication of FIFO costing just yet. But maybe I'm not understanding how Intuit is deploying this feature either.

NOW, LET' SELL SOMETHING AND SEE THINGS CHANGE AGAIN

The final part of the test was to record a sale and see how QuickBooks handles the costing of that.

So I created an invoice to sell 1 of these doors for a selling price of $599. Here is a screen shot of how the journal entry posted for that sale:

FIFO - Journal Entry for Exterior Door Sale

Good news: QuickBooks posted the cost of the sale as $308.51. This is exactly as expected in a FIFO environment. The first in is the first out, so the original cost from above of $308.51 is correct for the cost of goods sold.

Now, let's look at the inventory valuation one more time after this sale was made:

FIFO - After Item Sale on 12_18_16

QuickBooks is showing we now have 25 items (which is correct), with a total value of $12,127.59 and a cost per unit of $485.10.

Not so good news: To me, it looks like QuickBooks took the total value of $12,436.10 (after the purchase but before the sale) and subtracted the $308.51 (the cost of the item sold) to get a new inventory value of $12,127.59. That looks ok to me too.

From there - the $12,127.59 was divided by the on hand count of 25, resulting in a "cost" of $485.10.

HUH?

Based on this testing, it looks like QuickBooks is calculating a "blended cost" value for purposes of the inventory valuation report. It does NOT appear to be calculating based on "buckets" of inventory and may not be valuing the inventory on a true FIFO basis.

In addition, there is no way to verify how QuickBooks is doing these calculations behinds the scenes, as there is no type of audit report that I am aware of that will show the FIFO cost tracking information.

Remember, this is a sample data file that already had transactions in it, similar to how most businesses will be approaching the use of FIFO - they will turn it on in an existing file.

CALLING THE ACCOUNTANTS

So what is your take on this new feature? Are you using it in your business?

Is the way QuickBooks is valuing the inventory asset acceptable to you? Is this standard practice when dealing with inventory on a FIFO basis?

Please drop your comments in the box below - I'd love to get your take on this issue.

For now, I am unsure about this new feature in terms of the impact on the business balance sheet. l'll be doing some additional testing on this and report it in a separate blog post soon...

UPDATE:

After the initial post of this article, I had a great conversation with Catherine Fisse, a senior product manager for QuickBooks Enterprise about this issue.

After reviewing some pretty detailed examples and related information, I have concluded that QuickBooks Enterprise is properly tracking the value of the FIFO inventory on the balance sheet and valuation reports (I didn't have any concerns on the Profit and Loss - it was tracking just fine there).

We agreed there are a few reports where the presence of the column header that says "Average Cost" could be a bit misleading, but the data that is showing up within those columns is being calculated properly.

Since this FIFO inventory costing capability was new in QuickBooks Enterprise 2012, it will be interesting to see how Intuit continues to build on the reporting and functionality of this feature in future releases.

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Comments

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Scott. The quickest way to see FIFO in action is to do a Ctrl Y on the invoice or sales receipt. Then you can see the COGS amount which will reflect FIFO. Or drill down on COGS on the P&L. The valuation report will still show average cost column, as we needed to make sure users know how the value of your inventory is calculated.

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