Introduction

Not all companies can afford to have an automated inventory valuation, due to the many complexities that this tool, while very useful, can cause. An automated valuation saves you time and effort by posting automatic accounting entries related to the cost of sales and the increase and decrease of inventory; however, by doing it for every inventory movement, this means that it will also do it for inventory movements that we have validated by mistake: any entry, exit, return, or manufacturing order that we confirm erroneously will also generate an accounting entry. That is why automated valuation is only recommended for companies that have an almost perfect level of control of their inventories.

And what can all of us mere mortals do? Well, for that there is manual inventory valuation, in which the cost of sales accounting entries must be posted periodically, and as its name says: "manually." This means that there must be an analysis work every fortnight or month to determine the amount that we will send to the cost of sales, since the system will not do it automatically for us.

The simplest way to calculate the cost of sales is usually done by determining the initial inventory, adding the purchases in the period, and comparing it with the final: Cost of Sales = Initial Inventory + Purchases During the Period - Final Inventory.

For example, if a company has $100 in merchandise, during the month it buys $200 in inventory products and until the end of the month it has spent $50, the cost of sales will be calculated as follows: initial inventory ($100) + purchases of the month ($200) – final inventory ($50) = $250.

This becomes even more complicated when we have related production processes, since we must consider direct costs such as labor and materials, as well as indirect costs (water, electricity, maintenance, etc.) and add them to the cost of the product: Cost of sales = initial inventory (finished products) + production cost – final inventory (finished products). And if we add other processes such as sending product to scrap, inter-warehouse transfers, or returns, this ends up becoming even more complicated.

Ensuring a correct cost of sales calculation system is essential to ensure we remain competitive in the market; but let's be honest: between the thousand problems of day-to-day, the mountain of work, and occasional incidents, who has the time?

What if we could find a way to perform this much-needed flow in an agile, reliable, and accurate way?...🤔

[USECASE]

🚀 How to perform a manual inventory valuation without dying in the attempt 

Let's take the example of the following product: it is storable, it can be bought or manufactured, its cost method is AVCO (average), and its expense account (where it is accounted for when generating the supplier invoice) is "Inventory":

Now let's make a purchase and generate its inventory receipt and see how the generated valuation layer behaves:

1. Purchase

2. Receipt

3. Valuation layer

That is: one unit was purchased for $100 and that unit was received, therefore the value of our inventory is $100.

Now let's make a purchase and receive the same product but this time with a price of $80:

Our inventory is valued at $180: one unit at $100 + one unit at $80.

For this valuation to have an impact on our accounting records, we need to create a supplier invoice, as it will contain the expense account where our inventory is valued. Let's publish both invoices:

a) Purchase 1:

b) Purchase 2:

The trial balance now looks like this:

What would happen if we now source the third unit, not through a purchase, but through manufacturing?

Let's purchase the two components this product requires, validate their receipt in stock, and generate the supplier invoice (the expense account for these products is not "Inventory" but "Raw Materials and Supplies"):

1. Purchase:

2. Receipt:

3. Supplier invoice:

Our trial balance now looks like this:

• Inventory: $180
• Raw material and supplies: $100 ($40 + 60)

Now that we have the components in stock, let's proceed to manufacture the finished product and see how the valuation layer behaves (remember that manufacturing is also an inventory movement in itself):

1. Manufacturing order:

2. Valuation layer generated from the manufacturing order:

Our inventory value is now $280: one unit purchased at $100, another unit purchased at $80, and one unit manufactured at $100 ($40 + $60 which is the cost of the components, i.e. the “production cost”):

However, this impact on inventory value has not yet been accounted for. To do so, let's create a filter in our valuation report to display only the valuation layers related to a manufacturing order, filtering by references containing "MO" (Manufacturing order). We'll also publish both the consumed values ​​of the components and the generated values ​​of the finished product in a manual accounting entry.

1. Filter:

2. Related valuation layers:

3. Manual accounting entry:

The trial balance is displayed as follows:

• Inventory $280
• Raw material and supplies: $0 (consumed during the manufacturing process)

🤷🏻‍♂️ And what was all this for?

Remember that the goal of all this was to calculate the cost of sales? Well, in a manual inventory valuation, this process must be done by manually posting a journal entry that impacts the Inventory (decreasing it) and Cost of Sales (increasing it) accounts. However, we run into a problem here: our valuation report has several layers of different products, some for receipts, others for outputs, and still others for manufacturing orders. It also includes finished goods and components. Not only that, but what will happen when we've been operating for, say, 6 months? How many lines will there be? How will I know which of these to consider to determine the cost of sales for the current period?

To do this, we must first sell, deliver the product, and generate the invoice:

1. Sale

2. Delivery

3. Customer invoice:

4. Generated valuation layer

5. Trial balance

Step #1: Breathe

The valuation report may seem intimidating; however, we must remember that we have our best friends: the filters, to help us display only the information we need. So, let's use the "Valuation to Date" button to define the period over which we want to view the information:

Step #2: The Master Trick

By default, the valuation report takes into account each inventory movement, however, it doesn't show us the origin or destination of these movements. By adding a movement-related field that shows us the origin and destination locations, we can know where the product comes from, and, most importantly, which location it's going to. Remember that Odoo sends all sales to a virtual location called "partners/customers"? Well, what we'll do is filter by all those movements whose destination location is equal to "partners/customers," and that will give us our cost of sales in a super-simple way:

1. Source location

2. Intermediate location

3. Filter:

4. Result: this is the data that we should consider as “cost of sales”

Step #3: Post the cost of sales entry

By performing this procedure, we can now obtain the cost of sales in a much easier, clearer, and, above all, more reliable way:

Now you know how to perform a manual inventory valuation for your business in a simple, organized, and effective way😎.