Purchase invoice item unit different from inventory unit

[WildTZ]

We use a lot of different vegetable oils in our production. Usually it’s sold by volume (liters) but in our production and stock we keep everything in kilograms (kg) for consistency in production.

Purchase invoices therefor come in liters and I won’t know how many kg we will receive until the order has arrived and has been weighed.

Should I enter the liter value on the purchase invoices and simply amend them once the goods are received or what is the correct way of going about this issue?

Example: We ordered 100 liters of Sunflower oil, we received the 100 liters which weighs about 82 kg. The purchase invoice obviously says 100, should I just change this to 82 once received, weighed and verified?

[Davide]

You can use a production order to convert it. 83 kgs of the new product will be composed of 100 liters of the old one. Somehow is like a semifished product.

[Tut]

The purchase invoice only says liters because you entered it that way. You can also make the conversion before entering the invoice. You already know the conversion rate. There is no need to weigh shipments received every time, assuming you have a way of telling whether the correct liquid amount was received. Since purchase orders have no impact on inventory, you can even order in liters and receive in kilograms. Of course, to avoid confusion of undesignated units of measure, you may still want two different inventory items, one for ordering and one for purchase invoices.

[Davide]

Probably he wants to keep track of the original quantity. So maybe he can add a custom field to purchase invoice line (the one manager uses for inventory) in which he can save the original quantity (kg) and put the new quantity in the quantity column (liters). This would save him from double entries…

[WildTZ]

@Tut

You already know the conversion rate. There is no need to weigh shipments received every time, assuming you have a way of telling whether the correct liquid amount was received.

Oil density varies on batch and temperature. We could of course be less exact and just estimate but it would create some stock issues.

Is there an issue with amending the purchase invoice (change units and price per unit so the total matches the invoice)?

[Tut]

@WildTZ

Is there an issue with amending the purchase invoice (change units and price per unit so the total matches the invoice)?

No. In fact, a purchase invoice should normally match the supplier’s sales invoice. But this topic started with your question about converting one unit of measure to another. And you said the supplier sold by liters, yet you want kilograms. So now it isn’t clear what you are asking. Do you want your purchase invoices to match the suppliers’ sales invoices? Or do you want to operate in different units of measure?

If the first, remember purchase orders have no financial or inventory impact. So if its only a matter of receipts and sales invoices being different from what you ordered, that is easy. Just enter a purchase invoice that matches the sales invoice. There are many industries where delivered/invoiced quantities don’t quite match orders.

But if your real issue is different units of measure between purchasing and production, then you are going to need two inventory items for everything that is like this (oil in liters and oil in kilograms). In that situation, @Davide’s recommendation for production orders to convert is the best approach.

@WildTZ

We could of course be less exact and just estimate but it would create some stock issues.

Think about how serious the stock issues are. After months of production, will you be off by a few liters? An inventory adjustment would be normal, as bulk purchases almost never work out exactly. So at convenient intervals, write off or write on the difference. Maybe this happens as a container or tank is emptied, maybe at set intervals for inventory verification. I think the question is how much of a problem the difference caused by estimating would cause. Would you suddenly be unable to complete a production batch or fill orders?

[WildTZ]

@Tut

Is there an issue with amending the purchase invoice (change units and price per unit so the total matches the invoice)?

No. In fact, a purchase invoice should normally match the supplier’s sales invoice. But this topic started with your question about converting one unit of measure to another. And you said the supplier sold by liters, yet you want kilograms. So now it isn’t clear what you are asking. Do you want your purchase invoices to match the suppliers’ sales invoices? Or do you want to operate in different units of measure?

If the first, remember purchase orders have no financial or inventory impact. So if its only a matter of receipts and sales invoices being different from what you ordered, that is easy. Just enter a purchase invoice that matches the sales invoice. There are many industries where delivered/invoiced quantities don’t quite match orders.

But if your real issue is different units of measure between purchasing and production, then you are going to need two inventory items for everything that is like this (oil in liters and oil in kilograms). In that situation, @Davide’s recommendation for production orders to convert is the best approach.

I should have been more specific!

What I want to do is when the invoice is received I enter the liter amounts and the price per liter. Once stock is received I will amend the invoice and change to the number of kg’s actually received and change the per kg price so the total price remains unchanged.

This would give me the correct cost of the product in my stock without having to do a production order and enter duplicates for all our oils (70+) into the inventory.

For now I implemented @Davide solution.

@Davide

Probably he wants to keep track of the original quantity. So maybe he can add a custom field to purchase invoice line (the one manager uses for inventory) in which he can save the original quantity (kg) and put the new quantity in the quantity column (liters). This would save him from double entries…

@Tut

We could of course be less exact and just estimate but it would create some stock issues.

Think about how serious the stock issues are. After months of production, will you be off by a few liters? An inventory adjustment would be normal, as bulk purchases almost never work out exactly. So at convenient intervals, write off or write on the difference. Maybe this happens as a container or tank is emptied, maybe at set intervals for inventory verification. I think the question is how much of a problem the difference caused by estimating would cause. Would you suddenly be unable to complete a production batch or fill orders?

We will consider this. I’m a bit obsessed with knowing exactly how much we receive and have, it’s probably futile. I’m just worried that it will make it harder to determine the raw material cost of the products.

[Davide]

@WildTZ

For now I implemented @Davide solution.

Just for curiosity, which solution? Production Orders or Custom Field at line level?

[WildTZ]

@Davide

Just for curiosity, which solution? Production Orders or Custom Field at line level?

Custom field where I can enter the original “liter” quantity that will not affect my stock when I convert it to “goods receipt”.

Originally the quantity was 1000 and the price per liter 8.5. Once received I amended the kg’s (moved the 1000 to the new column for reference) and amended the per unit price (as it’s now in kg).

Does that make sense?

[Tut]

In my opinion, this is going to cause you more problems than it solves in the future. If you are going to order or purchase an inventory item in different units/prices than how you stock and use it in production, editing transactions seems like a terrible idea. You will end up with mismatched documentation and possible errors and omissions. And I predict problems with audits, delivery dispute resolution, and so forth.

I originally said you could order in one unit and receive in another. But I also said you needed two inventory items in different units of measure to do that. Personally, I think the production order approach is safer.

As for your obsession with knowing exact quantities on hand, that is an admirable goal. But you are very unlikely to achieve it. Just think of the oil that clings to a container every time you draw or use a quantity. Eventually, even if no other mistakes or spills or pilferage occurs, your quantity will be off and you will need to do an adjustment—usually a write-off. I’ve never seen a manufacturing or warehousing environment where inventory management was perfect. Physical verification and adjustment from time to time is always necessary.

[Brucanna]

@WildTZ

Oil density varies on batch and temperature. We could of course be less exact and just estimate but it would create some stock issues.

Yes, but those stock issues are insignificant compared to the average cost issues you are creating.

@WildTZ

I’m just worried that it will make it harder to determine the raw material cost of the products.

But that is the exact ramification of what your editing of the Purchase Invoice is doing.
Let me explain with these examples.

You have received two purchases invoices for coconut oil but only one has been edited to Kg:

The coconut oil inventory item looks like this:

Both the Qty on hand and the Avg Cost figures represents a mixture of Kg and L.
So if you happen to use the coconut oil in a production prior to the 2nd purchase invoice being edited, then the production order will transfer at a hybrid cost of 9.22 / Kg.

However, if both purchase invoices had been edited:

So that the coconut oil inventory item now looks like this:

Then the Qty on hand and the Avg Cost figures now represent the same unit - Kg and the production order would have transferred at the actual cost of 10.07 / Kg.

Therefore, your worries about making it harder to determine the raw material cost of the product is justified but that should be focussed on the potential of screwing up the average cost and subsequent product costing, not the inventory item Qty balance.

I agree / support that creating duplicate inventory items and using production orders is a duplication, but so is entering a purchase invoice as L and subsequently editing it to Kg.

Therefore my suggestion is this - enter the purchase invoice ONCE. Review the past 10 purchase invoices for any given product, coconut oil, sunflower oil etc and create an average Kg benchmark for that product. Still use the custom field as this records the suppliers invoice Qty.

This will avoid the problem of a purchase invoice being potentially not converted and if an inventory item needs a “small” Qty adjustment each six months, then this would be inconsequential in the overall scheme of things, .

[WildTZ]

Thank you for the examples and your suggestions. I think I follow your advice and use the previous averages.

We have a similar issue with suppliers who use lbs or oz instead of sensible units. There it’s easier though as it’s just a simple formula especially if I’m not concerned about the small discrepancies.