Inventory costs calculation

Hi guy,

I lately noticed that inventory items costs colum is calculated upon the amounts stated in the purchase invoice (which makes sense before the payment is done), but since purchases can occur from abroad using foreign currencies, Manager will calculate the cost based on the exchange rate set in settings by multiplying it with the total amount in the purchase invoice (in foreign currency), this ignores the actual exchange rate paid at the time of payment (usually multiple payments at different times & rates untill the invoice is fully paid).

I know the difference in exchange rates is expressed in the “Foreign exchange gains (losses)” account, but this will result in incorrect inventory costs and affect pricing of goods!

Is there a way to overcome this?

Thanks

This will not lead to an incorrect costing of your inventory items. The cost of a non monetary asset in foreign currency is based on the rate used for the purchase (The prevailing rate on the day of purchase). Even if the asset is having accompanying liabilities which are carried in foreign currency, the gains and losses on those liabilities (Payables) are not to be capitalised to the asset (inventory Item).

Foreign exchange gains/losses arising directly on the procurement of inventory items invoiced in a foreign currency when inventory items were procured on credit terms are not to be included in inventory cost. Interest/fees on late settlement are not be added too.

I hope this helped.

Thanks for replying @Abeiku, I now understand the part of accompanying liabilities if there are any, but what if the invoice consists of 1 item only and its cost price is including all other additional costs like customs, shipping, etc.?

Consider the following senario:

I buy 10,000 units of a product that cost 1$ each (All inclusive), my base currency is ILS, and the rate at the time of purchase was 1$ = 3.4 ILS and i set the exchange rate to 1$ = 3.4 ILS in settings at that day, now manager considers the cost of 1 unit to be 3.4 ILS in local currency, but at the date of payment a month later, the exchange rate becomes 3.5 ILS, now i have to buy the 10,000$ for 35,000 ILS instead of 34,000, the cost per unit now is 3.5 ILS but manager keeps showing 3.4 ILS.

What am i missing?

You are missing the fact that your cost did not change. It was established when you purchased. You seem to be confusing cost with current value.

Customs and shipping charges are no different. They can be added to the cost as freight-in. See https://www.manager.io/guides/9610. If those charges arrive on different days, when the exchange rate is different, that does not matter. Their costs are added as of the date they are incurred. Like the cost of the inventory item itself, those costs do not change because the exchange rate changes later.

@sigmas55 I hope you are ok now.

Thank you guys, i really seem to be confusing the cost with current value, unfortunately, in my business case, the last credit payment is paid against bill of lading, which is when i actually receive the goods and start the pricing stage, by the time of the last credit payment, multiple exchange rates would have been used to pay the total invoice (hence the change in cost), so i should somehow take this in consideration if I wanna stay profitable, i was hoping that there is an easy way to consider these different rates in the total cost of each item, because payments are usually complicated with 10s of items and multiple freight-ins.

Thank you again guys, appreciate your help.

@sigmas55, you are over-thinking this. You pay what you pay when you pay it. The fact that if you paid on some other date you might have to pay a different amount is irrelevant to your profitability. You can have as many transactions as necessary to buy the goods, pay the shipper, pay duties and customs charges, etc., all on separate days and different exchange rates. As long as each transaction is correctly entered either in your base currency or in a foreign currency at the exchange rate to your base currency in effect on the day of the transaction, the value of your inventory will be correct. It will not change. When you sell the goods, the cost of goods sold will be transferred at the current average cost. (The average cost will be based on what you paid when you paid it, not what you might have to pay today for the same thing.)

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I can understand your frustration, and I battled with this for a while myself.

I import stock that I bought in USD, but my sales and reporting are done in ZWL. Because of the high inflation here, by the time I actually receive the goods the replacement cost in ZWL has gone up hugely.

I may have bought something for US$10 / ZWL$50 when the exchange rate was 1:5, but when it arrives in my store the exchange rate is 1:10, so just to replace it I need to sell it for ZWL$100. It looks like I have made a 100% profit when in my mind I have made no profit at all, as it’s still US$10. But the fact is that in my base / reporting currency, I paid ZWL$50 for it and sold it for ZWL$100, and from the perspective of my accounting records and tax authority that’s not debatable.

I guess another way to think of it is to imagine that instead of the goods you had cash. If I started with ZWL$50 in cash in the above scenario, over the period in question this would have devalued from the equivalent of US$10 to US$5. If I had started with US$10 in cash I would have ended with the same US$10 in cash, but Manager would report a ZWL$50 foreign currency gain as it has gone from ZWL$50 to ZWL$100 in my base currency.

It might be worth discussing this with a local accountant, as others in your country are probably having the same issue, and there may be ways of factoring in the extra costs when reporting your costs of goods to the tax authority. I seem to recall my accountant mentioning something like this last year when I discussed it with her, but I don’t remember any details.

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