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How are assembly costs affected when I change a transaction?

The cost of inventory items is calculated by the average cost method.

The average cost of an inventory part or inventory assembly item at a particular point in time is determined by the total asset value of the inventory part or inventory assembly divided by the quantity on hand. The asset value of an assembly item is set by either its purchase price or its build costs. When an assembly item is purchased into inventory, its asset value is simply the purchase price. For a built assembly item, the asset value is determined by the sum of the average costs of all its component parts.

Inventory included in pending assembly builds is not accounted for when average cost is calculated. If you choose to edit a build transaction that causes many assembly builds to change to pending, therefore removing them from the average cost calculation, the average cost of your inventory as reported by QuickBooks will change. How do I find out which builds are pending?

When assemblies are nested (one or more assemblies are components of other assemblies) and you change a transaction that causes at least one build transaction in the nested hierarchy to change to pending, build transactions for related assemblies can change to pending as well. How does transaction modification affect build status?

If you use assemblies in your inventory, consider the following issues before deciding to change a build transaction:

  • How much of your inventory is accounted for in assembly items?

  • How great a change in value does your transaction change represent? If the resulting value change is negligible, the transaction's effect on the overall average cost of your inventory will also be negligible.

  • If you make a change to a transaction, how many assembly items is it likely to affect?

  • Are assembly items nested for many levels? Could changing one transaction force a significant number of assemblies to change to pending, preventing them from being included in the average cost calculation?

Answering these questions can help you determine whether or not the average cost of your inventory is accurately reported by QuickBooks.

Example

When calculating average cost, QuickBooks accounts for any change in the purchase price of your inventory. At build time, QuickBooks calculates average cost of assembly items by:

  1. Calculating the average cost for each component item.

  2. Multiplying the quantity of each component item specified in the assembly definition with the quantity of the assembly item.

  3. Multiplying the total quantity of each component with average cost value for the component.

  4. Dividing the sum of all component costs by the number of assembly units.

These calculations are summarized in the following table:

Transaction type Item type Component quantity
in assembly
Item quantity Cost of item Average cost
Purchase 1
July 10, 2002
Inventory part 1 N/A 10 $5 (10 x $5)/10 = $5

Purchase 2
July 25, 2002

Inventory part 1 N/A 5 $7 (10 x $5) + (5 x $7)/15
= $5.667
Purchase 1
July 10, 2002
Inventory part 2 N/A 3 $2 (3 x $2)/3 = $2

Purchase 2
July 25, 2002

Inventory part 2 N/A 3 $3 (3 x $2) + (3 x $3)/6
= $2.5

Purchase 3
August 5, 2002

Inventory part 2 N/A 3 $4 (3 x $2) + (3 x $3) +
(3 x $4)/9 = $3

Assembly build
August 8, 2002

Inventory assembly 1 N/A 4 N/A ($68.004 + $24)/4 = $23.001

Component 1

(Inventory part 1)

3 3 x 4 = 12 N/A 12 x $5.667 = $68.004

Component 2

(Inventory part 2)

2 2 x 4 = 8 N/A 8 x $3 = $24

To calculate an accurate average cost for all assembly items in inventory, QuickBooks also accounts for any previously built or purchased assembly items as follows:

  1. QuickBooks adds the average cost of the assembly items just built to any assemblies of the same type already existing in inventory.

  2. Then QuickBooks divides this final sum by the current quantity on hand.

From this example, you can see that if you change historical transactions (for example, change the purchase cost of Inventory part 2 (Component 2)), QuickBooks recalculates average cost for all transactions related to this assembly that follow the edited transaction. If the change you make is substantial, the effect on average cost could be significant.

KB ID# H_INVTRY_HOW_CHANGES_AFFECT_ASSEMBLY_COSTS
12/4/2016 6:17:56 AM
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