My Tax Auditor has just picked out a big issue with my COGS on my P&L.
One item I purchased has increased in price each year for the last few years.
In the first year, lets say 2018, it was say $100 and showed as such on 2018 P&L.
In 2019 it was $200 but shows up as $150 in the 2019 P&L and has changed to $150 in the 2018 P&L.
in 2020 it was $300 but shows up as $200 in the 2020 P&L and has changed the previous years to $200.
I’ve searched the forums but can’t find anything on remedying this. Or am I just doing something wrong?
You could provide some screenshots illustrating the changes in cost of the item as well as the reports that shows the cost treatment/calculations.
Also, you can go to Inventory Items tab and drill down the Total Cost column of one of the inventory item involved.
Take a screenshot of that screen as it will help us identify potential causes for this discrepancy.
@VACUUMDOG, remember that cost of goods sold is calculated in Manager according to the current average cost at the moment the sale is recorded, whether by sales invoice or receipt. Seldom will the cost of goods be equal to their most recent purchase cost, because you probably had some older units still in inventory, dragging down the average cost.
What puzzles me is your statement that the 2018 cost of goods sold has changed to $150 in the 2018 P&L. Cost of goods sold is fixed at time of sale, unless there was an insufficient quantity. Future purchases do not affect it unless they are bringing negative stock levels up. So @Ealfardan is correct; you are going to have to furnish illustrations of the drill-down on the cost balance for inventory items affected.
@Tut . I too seem to have the same problem as VACUUMDOG
For eg, say I have purchased 10 pieces of Item A in the year 2019 for $100 each and I retail it for $400. I sold 5 items out of this in 2019. I have a profit of $1500. The cost of my unsold inventory is $ 500.
In 2020, I purchased another 5 pieces of the same item at a price of $200 each. I now sell 6 pieces of my updated stock. Assuming my selling price is the same ie $400, then my profit for the year 2020 should be $1700 ( 5 pieces @ $300 and 1 pieces @ $200), and the cost of my unsold inventory would be $800 ( 4 pieces @ $200. However in manager.io, it shows my profit as $1250 ( 6 pieces @250, which is the difference between my Selling Price and my AVERAGE cost price of the item) and the cost of my unsold inventory is $ 600. ( 4 pieces @ 150,the average cost price of the item.
The software also tends to reset the profit for 2019 to $1250.( 5 pieces @ $250, the average cost price in 2020).
I also checked this issue with ZOHO books. There this problem does not arise. The old stock is sold at per the old purchase price. The new purchase price kicks in only after the old stock has been sold.
You miss the basic fact that Manager uses an average cost valuation method. It sounds like the other system is using first-in-first-out inventory valuation.
You seem to suspect that there is a difference in Gross Margin when using FIFO (ZOHO) and Average inventory valuation (Manager) which is not true.
For example:
You bought 10 pieces of item A at $100 = $1,000 value in 2019. You also bought 5 pieces in 2020 at $200 each = also $1,000 value. So for both years you would have $2,000 for 15 pieces or $133.33 per item using the average costing method. As you did not change the sales price (which is good for the example) and pegged it at $400 per item A you would have a total sales value of $6,000 giving you a Gross Margin of $6,000 - $2,000 = $4,000.
If you split the sales as in your example based on FIFO but now we assume that you will have sold all in 2020 of the new and remaining stock the following would apply:
- In 2019 you sold 5 pieces of item A so you earned (400-100)*5= Gross Margin of $1,500
- In 2020 you sold 10 pieces of item A and split because of purchase costs as follows
a) for the left-over stock of 2019 (400-100)*5= Gross Margin of $1,500 and
b) for the 5 pieces bought in 2020 (400-200)*5= Gross Margin of $1,000
The Gross Margin using FIFO are thus $1,500 (2019) + $1,500 (left-over from 2019) + $1,000 (2020 stock) = $4,000 and the same as when using the average method.
Thanks for the clarification.