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Learn More - Inventory Methods

Comparison of Inventory Methods



Overview


The eMaint X3 system offers three types of inventory methods to value your on-hand inventory:

  • Standard Inventory Method - this is the default method used in an X3 account
  • First In/First Out (FIFO) Inventory Method
  • Last In/First Out (LIFO) Inventory Method

The type of inventory method you choose directly affects the total inventory value of your stock and non-stock parts. While it is recommended that you decide which inventory method you wish to use during the initial setup of your inventory file, conversion programs have been developed to convert your inventory to the method of your choice.

The sections below will help you decide which method is right for you, and if a conversion is necessary, will explain what changes occur during a conversion from a Standard inventory method.


Standard Inventory Method


The standard inventory method values each part at its last cost, regardless of the history of purchase and receipt price of that part. The formula consists of multiplying your current On-hand amount by the Item Cost on the detail view of the part file.


FIFO Inventory Method


FIFO inventory method is when the oldest inventory items, or those that were first received into inventory (or otherwise brought into the inventory by means of a positive transaction) are the first items to be charged out. Each positive transaction (such as receipts, transfers in, etc.) is recorded by transaction date to the part record as it comes into your inventory.

As negative transactions (issues, transfers out, etc.) are recorded to the part record, those transactions are tallied against the oldest positive transactions first, until the full quantity of those positive transactions is consumed. Once the entire quantity of the oldest positive transactions has been consumed, the negative transactions (issues) are tallied to the next oldest positive transaction that has a quantity waiting to be removed from inventory. The FIFO process continues in this “first in/first out” sequence for all transactions on the part record.



In the example above, the part has two positive transactions (a beginning balance of 5 and a receipt of 3). Each transaction was assigned a FIFO quantity in the history, which starts at 0 and will work its way up to the total of the corresponding positive transactions as the parts are charged out. There are a total of 6 “issue” transactions. Because this is the FIFO inventory method, the first five “issues” were recorded against the earlier transaction; subsequent negative transactions will tally against the next earliest receipt transaction until the FIFO quantity on that transaction is consumed, and so forth. In the FIFO example, the 5 parts at $6 each will be recorded as consumed before the 3 parts at $6.50 each.


LIFO Inventory Method


LIFO inventory method is when the newest inventory items, or those that were last received into inventory (or otherwise brought into the inventory by means of a positive transaction) are the first items to be charged out. Each positive transaction (such as receipts, transfers in, etc.) is recorded by transaction date to the part record as it comes into your inventory.

The total quantity of the positive transactions is counted against until the total quantity of that transaction is used. After the entire quantity of the newest positive transaction has been charged out, it moves to the next newest positive transaction that has a quantity waiting to be removed from inventory. It does this in sequence of the newest part to the oldest part (the last item with a positive transaction in will be the first part to be charged to the work order).

As negative transactions (issues, transfers out, etc.) are recorded to the part record, those transactions are tallied against the newest positive transactions first, until the full quantity of those positive transactions is consumed. Once the entire quantity of the newest positive transactions has been consumed, the negative transactions (issues) are tallied to the next newest positive transaction that has a quantity waiting to be removed from inventory. The LIFO process continues in this “last in/first out” sequence for all transactions on the part record.



In the example above, the part has two positive transactions (a beginning balance of 2 and a receipt of 3). Each transaction was assigned a LIFO quantity in the history, which starts at 0 and will work its way up to the total of the corresponding positive transactions as the parts are charged out. There are a total of 4 “issue” transactions against work order # 131. Because this is the LIFO inventory method, the first 3 “issues” were recorded against the newest receipt transaction; subsequent negative transactions will tally against the next newest receipt transaction until the LIFO quantity on that transaction is consumed, and so forth. In the LIFO example, the 3 parts at $34.75 each will be recorded as LIFO transactions before the 2 parts at $33.47 each.

The pricing for the first 3 items was $34.75, the newer price. The charge for the 4th item was $33.47, the older price. Both prices were reflected on the work order charges. The inventory has been successfully reduced by $137.72 ((3 * 34.75) + (1* 33.47)).

If this record had been based on the standard inventory method, the actual cost of every part (regardless of history) would have been based on $34.75 because that was the price of the last positive transaction. The total charged from the work order would have been $139.00 (4 * 34.75).

If this record had been based on the FIFO inventory method, the charge method would have been reversed. The 2 @ $33.47 would have been the first to charge, then 2 more @ $34.75. The total charge to the same work order would have been $136.44 ((2 * 33.47) + (2 * 34.75))


Inventory Valuation Report


The Inventory Valuation Report in a Standard inventory account simply shows you an output of your entire parts file and the total value of each part, then the total value at the bottom line. The formula remains at Item Cost multiplied by On-hand Qty. If you have 10 of ITEM1 and the last cost was $1, your total value for that part is $10.

In a LIFO or FIFO account, the total value of the part is determined by multiplying the remaining LIFO or FIFO quantities by their corresponding prices. For instance, you have a quantity of 10 of ITEM2. This item has been purchased twice and never charged out. 3 of your 10 on-hand were received at $0.49. The remaining 7 were received in at $1.01. Your total value of ITEM2 would be $8.54. ((3 * .49) + (7 * 1.01))


Converting a Standard Inventory to LIFO or FIFO


As mentioned earlier, it is best to decide what your inventory method will be when you first establish and use your eMaint X3 account. However, conversion methods are available that can convert your account to these inventory methods.

When a conversion is run, we take your current On-Hand quantity as what you truly have on-hand. The history of the part does not dictate the actual on-hand of the part yet, as in some cases there may be incomplete part history from data conversions, etc to equal the on-hand. From the on-hand value, we then look through the history to find positive transactions to support the current on-hand and assign those transactions LIFO or FIFO quantities (as shown above).

In a LIFO conversion, we begin looking at the most recent positive transactions. If you have 10 on-hand in your inventory, we start at the top and work down until we have assigned LIFO quantities to positive transactions totaling 10. If there are additional positive transactions after this point, they are NOT assigned LIFO quantities and will be ignored. It is normal to see a drastic change in inventory value after this conversion.

In a FIFO conversion, we begin looking at the oldest positive transactions. If you have 10 on-hand in your inventory, we start at the bottom and work up until we have assigned FIFO quantities to positive transactions totaling 10. If there are additional positive transactions after this point, they are NOT assigned FIFO quantities and will be ignored. It is normal to see a drastic change in inventory value after this conversion as well.

While changing inventory methods is a fairly simple process programmatically, it is important to understand that making the change mid-flight may drastically change the total valuation of your inventory, and may require additional training of your staff for reporting and inventory control reasons. eMaint Support can easily answer any questions you may have regarding a LIFO/FIFO setup or conversion. Support can be reached by telephone at 856-810-2700 extension 2, or by email at support@emaint.com.