iVend Retail – How Costing Works in iVend with Subsidiaries

This article to explain how costing works in iVend Retail with Subsidiaries enabled in the environment.

There are two (2) costing methods available in iVend:

• Standard Cost

• Average Cost

In a retail business, stores can be placed in different geographical locations, and each can be far from the others in the store network. The related expenses can differ greatly when a product is received at distant store location, i.e. the same product’s cost may be different because of other expenses incurred on the product(s) for that store to procure them from various locations that could be much further away in distance for one store when compared with another.

Therefore, to obtain greater accuracy over profit for each store, the cost of the same product can be different for each store location in the network.

In iVend, you can define the product cost by either:

· Per Product: The same product cost will apply for the whole company and for every store

Note: In the scenario of the Subsidiaries functionality being enabled, then the product cost will be per Subsidiary

· Per Product Per Warehouse: The cost is calculated per product per warehouse and with the Subsidiaries functionality enabled, the same applies, i.e. the cost is calculated per product per warehouse per Subsidiary.

 Note: The Subsidiary feature works with iVend Unplugged only and with iVend versions 6.5 and above.

Now, let us look into iVend to learn how and where the Costing can be setup.

In the Management Console, when you create a new product, you are able to set the Costing Method as Standard Cost or Average Cost, then set the Costing Sub Method as Per Product or Per Product Per Warehouse:

                                                         Figure 1 – Product Master

Note: - When the Subsidiaries functionality is enabled in iVend, the Cost is defined and calculated in the local currency of the Subsidiary.

Standard Cost:

Normally, Standard Costing is used when you want to estimate the cost of a product or service, for example, installation, maintenance or delivery service. Therefore, for a Service type business, you do not have a purchase cost and you are less likely to know the exact cost of the service and in this way, it makes sense to use Standard Costing for your estimation. Standard Costing for products is rarer however, for situations when the cost of the product rarely fluctuates or fluctuations are very minor then a Standard Costing methodology may also be desirable.

In iVend, with Standard Costing, the cost is setup by date and the Cost of Goods Sold (COGS) is obtained by the date of the transaction:

                                                    Figure 2 – Product Cost

For example, the Standard Cost could be setup as follows:

So, if the sales transaction happens on June 11th, 2020, the system will select the product cost as $ 20.00. If the sales transaction happens on June 12th, 2020, the system will select the product cost as $ 19.00. And if the sales transaction happens on 13th June, 2020, then the product cost will be $ 21.00. So, the idea is, setting Standard Cost gives the Retailer the flexibility of setting a different product price on different dates, thereby controlling the profit.

Note: If the Subsidiary functionality is enabled, then the Standard Cost of the product is setup by each Subsidiary.

Average Cost:

Average Cost is commonly used in situations, where:

· The product is supplied by more than one source and the development costs along with the delivery costs to create and obtain the product varies significantly that it is impossible to assign a specific cost to an individual unit.

· The purchase cost varies greatly and frequently, so it makes sense to have an Average Cost calculated for the product.

If the product is setup with Average costing, then the product cost is calculated automatically whenever goods are received, such as: while performing a Goods Receipt PO or Goods Receipt. The new cost is recalculated based on current inventory value and the new receiving price:

i.e. New Cost = (Stock on Hand x Current Avg. Cost + Received Quantity x Received Price)/ Stock On Hand + Received Quantity

For example, a new product is created with a starting cost of zero.

The first purchase quantity of the product is 10, and the purchase price is $20 per unit, then after receiving, the cost of the product is set at $20 per unit:

                                            Figure 3 – Goods Receipt PO

Therefore, the current product cost is $20 and if a sales transaction happens at this time, then the system will select the current cost to calculate the profit, for example, the sales price is $30, the profit of this transaction is then calculated at $10, i.e. $30 (Sale Price) - $20 (Cost Price).

For the Average Cost, see Inventory View screen located on the Product master:

                                                        Figure 4 – Inventory View

Then next, we have a second purchase of the same product but this time it is with quantity 5 and the price is now $25, so the new cost is recalculated as follows, using the formula that we showed earlier:

New cost = (20 x 10 + 5 x 25) / (20 + 5) = 21.67

If sales transaction happened after the second purchase, then the system will select $21.67 as the COGS, for example: a sale with sales price of $30 happens, so the profit for this transaction is $8.33 i.e. $30 (Sales Price) - $21.67 (New Calculated Average Cost Price)

                                                            Figure 5 – Inventory View

If the Subsidiary functionality is enabled in the system, then the cost is calculated Subsidiary wise as shown below: -

Gross Profit Report

In the Management Console, go to: Reports > Gross Profit. There you can check the profit based on the costing methods running in the system, there are several reports available under this menu option, such as:

· Gross Profit By Customer

· Gross Profit By Customer Group

· Gross Profit By Invoice

· Gross Profit By Product

· Gross Profit By Product Group

· Purchase Price Variance

· Store Profitability

For example, the Gross Profit by Product report is shown below:

                                                             Figure 3 – Gross Profit By Product

This concludes the KB on – “How Costing Works in iVend with Subsidiaries”.