How to Track Value of Inventory in Dynamics 365 Business Central

I want to show you how you can use Dynamics 365 Business Central to help you accurately track the value of your inventory in your organization. We’ll take a look at the valuation, individual valuation policies for each item. We’ll look at standard costs and how we can review those and update them, and we’ll take a brief look at how to record the landed costs. Additionally, we’ll look at the quality and age of inventory and how to gauge that and make sure that you’ve got the correct value of that inventory on your balance sheet. We’ll look at write downs. We’ll look how we can report on the age of inventory. We’ll set up a separate quarantine site for inventory, and we’ll also take a quick look at batch quality, how we can record that and record results of testing.

Getting Started

So let’s get started. I’m logged into Business Central as an inventory manager. Let’s take a look at the items. This is my item list right here. Let’s take a look at this item. This is the item card for this item. This has all the information about the item that’s in the system. If you scroll down here, we can see costing information. We’ll look at the costing method. There are basically five different types. We’ve got FIFO, LIFO specific, which is for serial numbers. We’ve got average costs and then standard costs. We’ll take a look at the standard costs, how we can change that. But what you can do in Business Central is you can have a different costing method for all your different items. If you want to recommend against it, typically you want a single inventory evaluation policy that applies to all your inventory.

Standard Cost Valuation

The standard cost valuation method for inventory requires the users to look at standard cost over a period of time to make sure that they’re accurate and represent the cost that they want in their system. The other valuation methods like FIFO, LIFO, average cost update automatically. But let’s look at the standard cost. So this is my standard cost worksheet. This is where I can look at the current standard cost. I can also make changes to the standard cost if I want to. So let’s automatically fill this out and I’m just looking at the standard cost items. These are all the standard cost items I have in my system. The first ten here are component items, and those are all combined to make this finished good item. Here the tachometer driver circuit. And what I want to do here is I want to roll up the component standard cost into the finished good item. You can see right now that the finished good item has no standard cost. So what I want to do is roll up the standard cost. I’ll click on this and it pulls in a new standard cost for this item. It’s looked at all the components, it’s rolled that up, and now what I want to do is I want to implement the standard cost change. So I just click on this. I’m going to go ahead and run this. So the standard cost have been revalued. So what I want to do too is I can also make changes to the components. So say this one, I want to change the standard cost, move it up to 8 and a half cents. I can do that. I’m going to roll up the cost again for that finished good item. You can see the change here. It also made the change on this particular item. So I’m going to go ahead and implement the standard cost change. Let’s go ahead and do that and I’m done. That’s how easy it is to evaluate standard costs and make changes as you need to in your system.

Recording Landed Costs

Next, let’s take a look at recorded landed costs. So landed costs are additional costs associated with particular inventory receipts. It could be freight from the vendor, it could be freight from another vendor, it could be other types of cost like duties and insurance. So what Business Central allows you to do is easily record that and add that to the value of the inventory. There’s basically three ways you can do it. You can do it on the original PO with the vendor. You can do it on an additional purchase invoice to that vendor or an additional vendor like an insurance carrier, but you can also do it on inventory transfers. So if you’re moving items from one location to another and you incur some freight costs on that, if you want to, you can include those freight costs in the new cost of that inventory at the new location. So let’s take a look at a simple one here. This is a purchase order, and I’m bringing these items into my inventory. I’ve got a standard cost, but the vendor is going to bill me for freight. So I get an invoice that includes the item cost plus the freight cost. I can add it to the PO here. It’s easy to do. I select the charge item. I have got charge items already set up in my system, so I have added a line on my purchase order for the additional freight cost from my vendor. I need to assign it to the items on there, so go ahead and do that. This is an easy one here. I’m just going to go ahead and assign it and I’m done. Now the cost of that freight will be allocated to that particular receipt in my inventory system. It will automatically update the unit cost for that particular item. I’m going to go ahead and post that and I’m done. It’s that easy to add landed costs into your system. And again, it can be from the vendor, the original vendor of the items. It can be from an additional third party vendor for an insurance carrier, for example, or a freight company. It can also be for inventory transfers between your locations.

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Revaluing Inventory

The time may come when you need to revalue inventory that’s already in your system. Typically, the cost of the inventory in your system is based on the cost, the cost that you pay the vendor or the cost that you incurred to make the item. But what you can do is if the item loses value while you hold it, you can write it down if you want to. So for example, here’s an item here, and let’s just say that this particular item has been discontinued by the manufacturer, so it doesn’t have a lot of value because I can’t really use it in my current production. I can’t use it to sell because that’s kind of old product. So I’m going to write it down, and these are particular entries. These are receipt entries that represent the cost of this item in my inventory. I’ve got two for this item and what I can do is I can write it down. I’m going to write these down to $0.80 per unit. I can just put that in here and then I can go ahead and post this and what it’s going to do, it’s going to write down those particular items in my inventory for particular receipts. So going forward, the new cost for that particular receipt layer is going to be changed by this change that I’m making right here. I’m going to go ahead and post this. It will also create a journal entry that will go to my journal ledger because Business Central keeps track of inventory value in layers based on the inventory valuation method.

Inventory Aging

What you can do is look at inventory aging, see how long you’ve had that inventory. Start looking at if you’ve got some weaknesses. Maybe you have too much inventory. Maybe the inventory you have is way too old. You want to get rid of it. These reports help you look at that information and decide what to do with that older inventory. There’s two reports that help you do this. One is the item age composition by value, and the second is the item age composition by quantity. Let’s look at the quantity first. Let’s take a quick look at it, and here you can see I’ve got buckets of aging based on the criteria for that general report. If we scroll down a little bit, we start to see some older inventory in here, right? This gives me a good idea what to focus on to. Why do I have this around? Maybe I’m oversupplied. You need to get rid of it. Maybe you need to mark it down and move it out, but this gives you a good idea of where your inventory is by age. Now let’s run this report. This is the item age composition by value. This is another report that reports in the age of the inventory, but it gives it the dollar value. This will allow you to really focus on those items that maybe you should dispose of or get rid of some other way. Let’s scroll down here and we can see, oh, I’ve got a problem here. I either have way too many chairs or I need to get rid of them right now. Let’s take a look at this a little further. We can drill down into that item and see why do we have that. Maybe we’re calculating things incorrectly from a forecast standpoint. So I’ve got a lot of value here. I need to figure out what to do with this old inventory because that’s sucking up working capital. It’s also taking up room in my warehouse. So this report helps me figure out where the problems are. From here I can drill down in specific items and remedy the situation.

Quarantine Location

Another thing I can do is I can set up a quarantine location in my inventory that allows me to put items in there. Maybe they’re items coming in from receipt, I need to inspect them before they go into the general inventory. Or maybe I have some bad items. I want to quarantine those, so all I need to do is set up a separate site here. I’ve got one for quarantine. It’s simple to do. It’s just a regular site. There’s not a lot of magic involved in this,

but allows me to segregate these items from my regular inventory. So when people are looking to fulfill a sales order, they can avoid the items that are in quarantine because there must be a problem with them. This is one way to handle that and it’s easy to implement. This is a nice little feature in Business Central and specifically for items that are controlled by lot number, it allows me to add additional information about the lot.

Batch Quality

So for example, let’s take a look at this lot right here. This is a lot for a particular item. This is the item right here and it allows me to record test quality and also additional information. I include notes on here. If I want to test quality, I can specify that and then I can also block it. So this is blocked right now. So I cannot use this lot in my system. This is a simple but effective way to control lot integrity within your system.

Conclusion

So we took a look at how Business Central can help you control the valuation of your inventory in your organization. We looked quickly at inventory valuation policies. Now you can have different ones for different items if you want to. We looked at how easy it is to work with standard cost, make adjustments when you need to and roll those out. We quickly looked at recording landed cost as well and the different ways that you can do that. Then we looked at the quality aspect of inventory. I can write down inventory when it loses value as I hold it. I can also look at the inventory aging to see how old the inventory is and really focus my attention on items that may be causing a problem. We looked at how you can set up a separate location code for quarantine items. This is an easy way to do it. And we looked at batch quality, how you can record a lot of information about a particular batch in your system. These are effective ways to control the valuation of the inventory in your organization.

If you have any questions or need further assistance, feel free to ask!