Profit inflation and high average cost

complicated issue. And we do not know how to deal with it in MANAGER
I bought a quantity of 10 items of different quality from the merchant for a value of 1000$
I sold 5 pieces worth 1000$ of the best quality
I have 5 pieces left in stock with a market value of 100$ ( during the quality assorting )

The MANAGER calculating is different from the reality because it calculates the average cost of the commodity. So the result of what I have left in stock is 5 pieces with a value of 500$

At the yearend , the value of the remaining inventory is not real, as( 500$ ), and the value of profits is high ( 500$ )

The real problem is that we buy many goods under one inventory item . So you can imagine the real problem we are in from the inflation of profits and the value of the remaining inventory , which in fact are much less value than what the MANAGER shows.

our question: how we can deal in MANAGER with the inventory to show the remain items value cost ?

Manager only uses weighted average for inventory valuations. The justification behind this choice is described in detail in this post:

Manager only uses weighted average for inventory valuations. The justification behind this choice is described in detail in this

how can I deal with the inventory value cost and profit to match the books ? any solution?

I’m not sure what you mean by your question. All inventory valuation methods other than Specific Identification are estimates based on some underlying assumptions.

If you say that you want to match your cost to something else, this implies that you know the true cost. In this case, you don’t really need Manager to tell you the cost, do you? :slightly_smiling_face:

I’m sure the logic I used to reach this conclusions has holes but I need more information from you to plug them.

So please provide more information:

  1. What is your True Cost?
  2. How did you arrive at your True Cost?
  3. How is your method better than weighted average?
  4. Is there any legal or regulatory requirements?

true cost its the market value that I mentioned in the example ( 100$ = 20$ for each items or the remain weight ) how can I tell the MANAGER that my remain inventory weight cost its worth 100$ total, not 500$ as the average cost.

in another way. I sold the best 5 items for 1000$ to recover my purchase cost and the quantity remain its my profit ( that worth 5 x 20$ = 100$ )

I would advise to create a test business, to get a clearer picture.

  1. You create a test inventory item.
  2. You create a payment to purchase 10 items at $100 for a total of $1,000
  3. When you view the inventory tab it shows that you have 10 items at $100
  4. When you look at the summary screen should would see below screenshot (or similar) with $1,000 inventory on hand (BS), - Inventory-sales & - Inventory-cost (P&L) as it should.

  1. Now you create a receipt for 5 items at $200 a piece (high quality) at a total of $1,000. The Summary screen now shows Inventory on hand $500 (BL, as you sold 5 out of 10 pieces that you purchased in essence for $100 per piece) and $500 for the 5 pieces sold as Inventory-cost (P&L) while Inventory-sales (P&L) is $1,000.

  1. From the same Summary screenshot you thus realized a Net profit of $500 with still $500 in Inventory in hand in Assets. Profit is only calculated in the P&L (Profit and Loss account) and never from the Balance Sheet. Only when you sell the remaining inventory items will the Net profit change based on the sales price while the cost price will remain the same except when you buy new Inventory then the average value will be used for the Inventory items on hand.

So please note that only when you sell inventory will the Profit and Loss account create values that lead to profit. Purchasing inventory items only shows at the Balance Sheet part with moving the value from bank to assets.

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The market value is impossible to be automatically calculated within an accounting software.

And although it has some applications in decision making, market value costing (formally known as replacement costing) isn’t allowed in financial accounting.

Now, you have two options:

  1. Manually adjust the value of an item without entering any quantity. See this guide: Write on inventory | Manager.
    But I don’t recommend this way.
  2. Since you mentioned that the cost depends on Quality, the best practice here is to create separate inventory items for each grade of quality. This makes things a lot easier to manage and should help you get closer to what you intend.

I recommend that you go with option (2) since using a single item for dissimilar qualities will in fact cause such discrepancies as you just described.

Manager’s calculated average cost is definitely not different from reality. It is reality, because it represents the average cost of the units you told it were all the same inventory item. You seem concerned only with the lower quality units that remain in stock. But you are ignoring the higher quality units you already sold.

When you sold the higher quality units, you overstated your marginal profit (and probably paid more tax), because profit was determined based on a lower average purchase cost. If you now sell the lower quality units, your marginal profit will be lower, because it will be determined from the initial average cost. You may even appear to lose money on the sale of the lower quality units. But the average marginal profit will be the same.

Whether this matters depends on your turnover rate. If everything sells within a financial period, you will notice nothing. But if sales are stretched across more than one period, you will notice higher and lower profits. Still, the combined profit will be the same over the long term. This is a factor you should consider in determining whether to create different inventory items for different qualities.

As already explained by others, you cannot and should not. You are combining concepts incorrectly. The balance for these items in Inventory on hand is determined by their cost, not their value. That would, in fact, be true whether you are using average weighted cost, first in first out, last in first out, or any other method for tracking cost of goods sold. That last phrase is the important one—cost of goods sold, not value of goods sold. The value of goods sold is represented by their sales price.

As you review accounting data for management purposes, the assets in Inventory on hand can only be represented by what you paid to acquire them.


Good explanation @Tut

thank you @Tut for explanation

this what exactly happened since the remain items not had been sold in the same financial year. the profit its too high plus the actual average cost of the remain items its can’t be traced for the auditor.

since we are buying from different vendor as bulk quantity and we combined all items together under one items and later we do quality assorting, is there is a way to point the quality items for the determined inventory items

Yes they can. Any auditor will understand average cost inventory accounting. Because Manager is a perpetual system, the cost information is carried forward from year to year.

Yes. Buy the items as one item, either high or low quality. Use production orders to convert some to the other. Note that because you bought them at the same average cost, the different items will have the same average cost. You must give up the idea that different units have different costs because they can be sold at different prices.

I think that is the point. Your acquisition costs are determined when paid and can not be revalued. The revaluation is a result of selling it a higher value than what you paid for and the difference is called profit. It is illegal to inflate the value of the inventory items based on new sales value because you would decrease the profit margin for tax purposes which constitutes tax avoidance. I hear you argue that the value changes because of averaging the costs when new purchases are made but you can do lots of mathematical trials the total cost of the inventory items will remain the same. For profit calculations it is this total cost that gets subtracted from total sales and as @Tut points out can indeed fluctuate over the years if you have items long in stock and kept purchasing more.

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For business viability I agree a business should sell stock at current replacement costs plus operating costs/profit.

However what is actually happening is they are selling old stock at a higher profit which is being reinvested in new stock.

An alternative view is stock can be revalued at current market value resulting in an unrealised gain/loss. Which is realised when the stock is sold.

Businesses can only sell at the market price ie whatever the customer wants to pay

They have a choice to sell or not to sell, if they consider the price too low but the market price is usually determined by the overall market and not the seller - unless it’s a monopoly, of course.