An inventory valuation of a company which helps to know the monetary value for products in their inventory. To ensure financial records on inventory reports, calculation of them is very important.
The inventory valuation method is defined inside the product category. Firstly we can look at the product category. The product category is assigned to products to identify what category the product belongs to. The product category can be created from the inventory -> Configuration -> Product categories
We can see all the existing categories, and also we can create new categories by clicking the CREATE button in the form. The Product category form is shown in below.
Category Name: Category Defines the name of the product category.
Parent Category: In some cases, a category is the child of another category. So, in that case, we can mention the parent category of the created category on the required field. If the category is not a child category, It is unnecessary to fill up the field.
Routes: Routes define the path on which the product moves to the destinations.
Force Removal Strategy defines how the product should leave the inventory source location. It can be First Expiry First Out (FEFO) or Last In First Out (LIFO), or First In First Out (FIFO).
Costing Method: Which Defines how products are valued. There are 3 types of Costing methods in Odoo they are.
- Standard Price: The products are valued at the cost price that we are given. It doesn’t change until manually done by the user
- Average Cost (AVGCO): The product cost is valued at its average cost
- First In First Out (FIFO): The product cost is valued based on the cost of the first product in and out from the inventory.
Inventory Valuation: This decides whether the inventory changes need to be recorded or not. There are two types of inventory valuation they are:
- Manual: If we select manual inventory valuation, then accounting entries will not be recorded automatically once the product enters or leaves the inventory.
- Automated: If we select automated inventory valuation, then accounting entries will be recorded automatically once the product enters or leaves the inventory.
Cost Variation based on Inventory Valuation
Standard costing: For the standard costing method, the cost of the product does not change due to a sale or purchase. We can manually change the cost of the product if needed.
Average cost: average costing method the cost of the product is taken as the average cost. If we purchase a product whose costing method is chosen as automated, the product cost will change automatically.
For Example, Consider a product with costing method average cost, for which 10 products are we purchased for 20 rupees. Then again, purchase the same product 10 units again with 50 rupees. Then the cost change.
Initially, 10 units of product we are purchased for 20 rupees. So the cost will be (10*20)/10 = 20
Then Again, 10 units of products we were purchased for 50 rupees. So the cost will be the average cost of These purchases.
Average cost will be ((10*20) + (10*50)) / (10+10) = 35
The inventory valuation will record the product value that we bought and sold.
The negative value represents the value of products that are sold.
In this costing method, the cost of the product is updated based on the removal strategy first in first out. For example, a product with a removal strategy as FIFO. Then, we can see how the purchase and selling of the products change the product cost.
Firstly, a product of 10 units was purchased with a unit price of 8 rupees. Then the product cost was updated to 8 rupees.
Then again, 10 products were purchased for the unit price of 15 rupees. But here, for the second purchase, the cost of the product does not change.
Now we sell 10 products. So the products will be removed from the first purchased set. Then check the product cost.
The product cost now changed to 15 per unit. That is the cost of the secondly purchased set.
Here the negative quantity refers to the sale, and the positive quantity refers to the purchase. These are the different costing methods in Odoo 15.