Getting started with cost of sales

Open: Sales Order Processing > SOP Utilities > System Set Up > SOP Settings | Default Accounts.

• Use this to choose whether to amalgamate the account number in the Stock issues account or the Asset of stock account set up on the stock item, with the cost centre and department code used by the revenue account.
• Select Stock Issues Account if you want the costs of issued items to be posted to the same cost centre and department as the revenue posting, so that the profit for each cost centre and department can be analysed.

If you don't select this option, the cost centre and department from the stock item issues account is used for the cost of sales posting.

• Select Asset of Stock account if you want the value of the issued stock to reduce the Asset of Stock for the same cost centre and department as the revenue posting.

If you don't select this option, the cost centre and department from the stock item stock account is used for the asset of stock posting.

Note: As the Asset of stock account should be a Balance Sheet account, this will only have an effect if you have chosen to Split postings between cost centres for balance sheet accounts.

Note: If you select these you must ensure that you have valid nominal accounts for the account number plus all possible cost centre and department combinations. Otherwise, the postings may go to the suspense account.

Open: Sales Order Processing > SOP Utilities > System Set Up > SOP Settings | Order Processing.

• Use this to choose when and how your stock records are updated for goods despatched through Sales Order Processing.
• Select Order despatch is confirmed to calculate and post the cost of the items to the Cost of Sales and Asset of Stock accounts associated with the stock item, as soon as the items are despatched.

Stock is updated immediately, updating the stock valuation. However, if the invoice for the order is not posted for some time after despatch, the costs and revenues for the order may end up in different accounting periods.

• Select Invoice is posted to update the stock system when the SOP invoice is posted to the Sales Ledger. The Nominal postings and stock system are not updated until then.

This ensures that revenue and the costs from the order are posted in the same accounting period. However, it means that your stock valuation will not reflect the issued stock as soon as it is issued, but only once the SOP invoice is posted.

If you select Invoice is posted, you can also select Use invoice date on stock history so that the stock history reflects the date the stock was updated rather than the date the stock was actually issued. This may affect the retrospective stock valuation report.

When SOP orders are processed they update the stock system for the items issued. The stock system is updated, either as the goods are despatched (Order despatch is confirmed) or as the invoice is posted (Invoice is posted), depending on your selection on the Order Processing tab in SOP Settings.

Open: Stock Control > Utilities > System Set Up > Stock Control Settings | Options.

• If you select Generate cost of sales postings for SOP, the value of the items issued is calculated according to the costing method specified for the stock item, as SOP updates the stock levels. This helps to keep the value of stock held in line with the Asset of Stock account in the Nominal Ledger and ensures that the Cost of Sales is accurate.

To calculate the exact cost of this stock after it has been issued may not be possible as the system may have updated the average or standard cost. For FIFO and Actual cost items, once the stock is moved the costs are no longer known.

So using this option is the best way to ensure the nominal ledger is updated with accurate cost of sales figures and the Asset of Stock is kept in line.

If you don’t select this option, the cost of the stock movements must be calculated manually and posted to the Asset of Stock and Cost of Sales nominal accounts using a manual journal.

Open: Stock Control > Stock Maintenance > Product Groups | Details.

• Select the Costing Method for the product group from the drop-down list.

  The costing method is used to calculate:

  • The cost of sales from your sales orders.
  Note:
  In order to avoid restricting business operations, Sage 200 supports the sale of goods before their cost is known.
  There can be significantly different cost of sale values for the same sequence of purchases and issues depending on the costing method used.
  • In the case of Standard costed items, the cost of sales is calculated using the standard cost at the time of the sale. This is not adjusted when the actual cost becomes known.
  • In the case of Average costed items, the cost of sales is calculated using the average cost at the time of the sale. This is not adjusted when the actual cost becomes known.
  • In the case of Actual costed and FIFO items, the cost of sales is calculated using the average cost at the time of the sale. This is adjusted when the actual cost becomes known.
  • The value of stock.
  • The transactions posted to your stock nominal accounts.
  Manufacturing users

  • If you are using Manufacturing, the cost of stock items issued to works orders.
  Note:
  In order to avoid restricting business operations, Sage 200 supports the issue of components to works orders before their cost is known.
  There can be significantly different values for the cost of finished goods for the same sequence of purchases and issues, depending on the costing method used for the components.
  • In the case of Standard costed items, the issue cost is calculated using the standard cost at the time of the issue. This is not adjusted when the actual cost becomes known.
  • In the case of Average costed items, the issue cost is calculated using the average cost at the time of the issue. This is not adjusted when the actual cost becomes known.
  • In the case of Actual costed and FIFO items, the issue cost is calculated using the average cost at the time of the issue. This is adjusted when the actual cost becomes known and the works order is closed. Works orders can only be closed when all costs are known.

  Choose from the following costing methods:

  Costing method	Description
  FIFO (First in, last out)	This uses the oldest price paid for the stock item until all stock bought at that price is used. Then the next cost price is used. Example You buy ten items at £10 each. You buy an additional five items at £15 each. You now have 15 items in stock. You sell seven items. The cost price of these items is 7 items x £10 = £70. You sell the remaining eight items. The cost of price of these items is (three items x £10) + (five items x £15) = £105. The cost price of an item is updated when the goods are confirmed. This happens when goods are recorded as received in Sage 200 and the cost price is known.
  Standard	This uses the Standard cost price specified on the stock item record Details tab. The standard cost price can be changed at any time on the stock item. Each time you change the standard price of an item, it is recorded in your Sage 200 database. This is used to calculate the value of your stock retrospectively. Standard costing is useful if you want to value your stock consistently, disregarding the variability of the price you actually pay for it. It can also be used if you need to account for additional costs associated with an item. For example, stock items that are bought in and have some type of processing done to them before they are sold.
  Average	This uses the average buying price of the items currently in stock. The average buying price is calculated in the following way: (Total price paid for the goods in stock) ÷ (the number of goods in stock) Example You buy one item at £10. You sell this item. You buy a second item at £15. You buy a third item at £20. The average buying price is the average cost of the second and third items: (one item x £15) + (one item x £20) / 2 = £17.50. The average buying price is updated each time goods are confirmed as received in Sage 200 with a known cost price. Sometimes is not possible to update the average buying price of the goods. This can occur if the cost price of the goods is updated when the invoice is recorded, and you have a stock level of zero for an item. If you then receive and sell goods before entering the purchase invoice, Sage 200 cannot update the average buying price as the stock level is still zero. In this case, Sage 200 uses the cost price of the goods on the purchase invoice as the average buying price. Example You have a stock item with a stock level of zero. The last time the item was purchased the average buying price was £5. You buy ten more items at £8 each. You record the receipt of the goods in your warehouse, but you do not record the purchase invoice. The cost price of the goods is not confirmed. You sell all ten of these goods. Your stock level is now zero. You enter the purchase invoice and confirm the price of the goods. Sage 200 cannot work out the average buying price in the usual way because (ten items x £8) / 0 = 0. In this case, the average buying price is updated to £8. This is the cost price of the items just purchased. Note: To make sure the average buying price is always up to date, we recommend that you choose to update your cost prices when the goods are received, on the POP Settings Order Processing tab, rather than when invoiced. For more information, see Average buying price.
  Actual	This can only be used with traceable stock items. This uses the price paid for an individual item when it is confirmed and the cost price is known. Example You buy five items at £5 each. They have serial numbers 1 - 5. You buy another three items at £8 each. They have serial numbers 6 - 8. You sell three items with serial numbers 1, 2 and 6. The cost price of these items is (two items x £5) + (one item x £8) = £18.

  You cannot change the costing method on individual stock items.

  Changing the setting

  This cannot be changed once there are items linked to the product group.

Open: Stock Control > Stock Maintenance > Product Groups | Details.

• If you select Allow Negative Stock on the stock item product group Details tab, then there are implications for postings when using a costing method other than Standard.

  Asset of Stock postings for issues of negative stock

  The true cost of these items cannot be known, as this is only recorded when items are added into stock. The average cost price is used on the nominal postings to the Asset of stock for negative items. When items are added to cover these negative amounts the true cost may be different. At that point the difference will be posted to the Asset of stock. However, this adjustment may be posted into a different accounting period than the original posting.

  Cost of Sales postings for issue of negative stock

  Again as the cost of the items is unknown, the average cost is used to post to the Cost of Sales. When the goods are received and the true cost known, any difference is posted as an adjustment to the Cost of Sales. This adjustment may be posted into a different accounting period than the original cost of sales posting.

Having unconfirmed stock has implications for cost of sale postings if the stock is issued to sales orders.

Open: Purchase Order Processing > POP Utilities >System Set Up > POP Settings | Order Processing.

• If you select Allow prices to be updated when goods are received, then the quantity of stock is added in Stock Control and the order price is used to update the value. The cost of sales is posted immediately, based on the order price.

When the purchase invoice is recorded and the true cost known, the purchase value using the order price is posted to the nominal. Any difference in value between the order and the invoice price is posted to the Differences account you choose.

Stock is always valued at the order price. This means stock issued to sales orders always has a confirmed value, avoiding the need to post adjustments to the cost of sales postings. However, if the invoice and order prices vary, this may mean you over or under value your stock.

• If you don't select Allow prices to be updated when goods are received, and leave it clear, then the quantity of stock is added in Stock Control but with an Unconfirmed value. The cost of sales is posted immediately, based on the standard or average cost of the stock item.

When the purchase invoice is recorded and the true cost known, an adjustment to cost of sales will be posted for any difference in value.