Peculiar Problem in Stock Valuation....Help Needed on how to get things right?

[Addy]

Hi All,

With release of the recent analysis pack the great thinkers and coders at erpnext have given me ample reason for sleepless nights.

I had a chance to go through the stock analytics and this is again truely a work of art by the developers, and as soon as I started playing around with the tool I found a major flaw in our account, please note this is a flaw in our account and not in erpnext.

I found that the stock valuations are being calculated by the purchase receipts and by stock entry. This means that when we buy an item and put a purchase receipt then the value of that item is update as per the receipt provided we have entered the price correctly.

Now this scenario is good for items which are bought, like in my case the raw material that we buy. The system is quite good at evaluating its valuation though I have not tested as to how accurate is the system in implementing the FIFO or moving averages in the valuation.

But since we are a manufacturing organisation, I would like to bring to the notice of our developers that most of the items (infact all) that we sell are manufactured from raw material that we buy. Now the valuation of the items that we sell is not correct in the report since we don't enter the correct valuation of those items in our stock entries.

Now here lies the problem and the trouble, because when RM is converted into a Finished Good (FG) we create a Stock Entry with type "Other" wherein we issue the amount of RM from RM warehouse and then receive the amount of FG produced in one of our process warehouse. Now in this case what happens is that the RM incoming rate is automatically pulled when we enter the RM item code as per the last purchase or whatever but when we receive the FG in a particular WH the incoming rate is blank and since we have a lot of FG items around 6k item codes therefore it is humanly impossible to enter the incoming rate for each item individually so to make things easier we always put the incoming rate as 1 in case where the rate is not pulled.

Now this shortcut is costing us the exact valuation of our inventory and I am not sure how to tackle this problem since all the items in our analytics for FG item are priced at Re.1 and hence the total inventory valuation is based on the Re.1 value which we use in stock entries.

I would like to know from the developers or from any one who can let me know that how could I enter the valuation of the item in stock entries where stock entry is supposed to be done by production people who would have no idea as to what is incoming rate.

@Rushabh: I think you are an expert on this issue as always and your help would be highly appreciable.

[Rushabh Mehta]

Aditya,

Thanks for your kind words on the Analytics module :)

We are shortly going to release the Accounts-Inventory integration (Nabin will post more on this). With this, Stock in Hand will be automatically updated from Purchase Receipts and Expenses from Sales Invoices. So having the right valuation will become even more critical.

In your case where your current valuations are all messed up (and I am sure there are other users too, because the system does not give incentive to update correct valuation via Stock Reconciliation), what you should do is.

1. Make a Journal Entry to update your correct Stock in Hand based on your actual stock.

2. For entries post the date we release the integration the Stock-in-Hand + Cost of Goods Sold will be automatically updated.

3. For earlier entries, you will have to manually check the ledger postings at the time of Purchase Invoice and Sales Invoice till all the older entries are out of the system. The system will allow you to manually edit the ledger postings in case you need to make an adjustment.

This will all happen post we release our Accounts-Inventory integration module, which we are testing at the moment. Hope to release it soon.

best,

Rushabh

W: https://erpnext.com
T: @rushabh_mehta

[Addy]

Hi Rushabh,

I know the account inventory integration has been release some time ago but still we are facing a problem with the valuations of our inventory in the stock analytic.

We are facing an issue with keeping the stock valuations accurate since most of the items are manufactured and in stock entries people really don't know the stock valuation of the each item and hence in the valuation rate we are generally putting the value as 1.

Now I know this is creating the problem of messed up valuation and hence I would like to know that how does the stock valuations are supposed to be entered in stock entries. Let me give an example.

There are 2 warehouses WA and WB and 1 item ITEM-A

Now if we put a reconciliation of ITEM-A in WA and WB with some valuation rate then would the stock entries take the valuations by itself for those WH even after their quantities in those warehouses goes to ZERO.

I know the stock valuation thing is great and I would like to get the implementation of that thing done but the Stock Entry part is actually creating a lot of issues in our valuations.

Looking forward to your kind suggestions for this issue.

[Rushabh Mehta]

Aditya,

We realized too. We have already redesigned this feature so that "Stock-in-hand" is maintained for each Warehouse separately and the stock value will always match for Stock in hand (including the back dated entries).

Nabin has already built the feature, he will release it this week.

best,

Rushabh

W: https://erpnext.com

T: @rushabh_mehta

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[Addy]

Hi Rushabh,

Can you please let me know how to get our inventory's valuation corrected. what I can do to get my valuations correct I can make stock reconciliation at end of every month for prior time where I can put the valuation rate for each item in each warehouse.

But the problem is that in the normal course of working there are a lot of stock entries and there the valuation rate does not come in stock entries and since no one in company can calculate the valuation rate for each item in each warehouse and hence for ease of use we put the valuation rate as 1. Now I hope this problem has been resolved.

Something similar to above also happens at the time of stock reconciliation, when doing a SR when qty of an item becomes zero is previous valuation rate is not considered and the system asks for valuation rate from the user which he/she is not aware of and hence for convenience they put the valuation rate in SR as 1 only.

Kindly let me know if the system is robust enough to start tracking the valuation rates and what have been done to over come the above 2 problems.

Would really appreciate if you could enlighten me on the above points with regards to the new inventory accounting integration.

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[Addy]

One more thing which is there is that in auto inventory accounting how does the system handles the items from Fixed Assets like machinery etc. 

Ideally speaking when we purchase a machinery then the Plant & Machinery account is Debited with the machinery amount and the value of the machine and on deducting depreciation we could have the value reduced (Credited) to the Plant and Machinery but I cannot seem to find this of a thing happening in erpnext.

[Umair Sayyed]

Hello Aditya,

In Perpetual Inventory Valuation system, you should make Stock Reconciliation for updating fixed assets item's depreciation.

In Stock Reco. template, you should update post-depreciation value of fixed asset items. The depreciation value will be booked in Expense Account selected in the Difference Account field of Stock Reconciliation form.

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Thanks and Regards,
Umair Sayyed
www.erpnext.com

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