When you sell or use inventory, the cost layers are updated to reflect the decrease in stock. Here’s a step-by-step explanation of what happens:

Selling or Using Inventory: Step-by-Step

  1. Identify the Oldest Cost Layer:
    • The system uses the FIFO (First In, First Out) method, which means it starts with the oldest cost layer.
    • The oldest cost layer has the stock that was received first.
  2. Deduct from the Oldest Cost Layer:
    • The system deducts the quantity of the sold or used items from the oldest cost layer.
    • If the quantity in the oldest layer is sufficient to cover the sale or usage, the deduction is made entirely from this layer.
    • If the quantity is insufficient, the system deducts as much as possible from this layer and then moves to the next oldest layer to continue the deduction.
  3. Update Cost Layer Information:
    • The quantities in the cost layers are updated to reflect the deductions.
    • If a cost layer is completely exhausted (all units are sold or used), it is marked as empty.
    • The cost of the sold or used items is calculated based on the cost recorded in the cost layer.
  4. Create Placeholder Cost Layer if Needed:
    • If the total quantity in all existing layers is insufficient to fulfill the sale or usage, a placeholder cost layer is created to track the shortfall.
    • The placeholder layer helps in managing and tracking inventory discrepancies until the stock is replenished.

Example Scenario

Let’s go through an example:

  1. Initial Cost Layers:
    • Layer 1: 100 units @ $10 each (oldest layer)
    • Layer 2: 50 units @ $12 each
  2. Selling 120 Units:
    • The system starts with Layer 1.
    • Deduct 100 units from Layer 1:
      • Layer 1: 0 units (exhausted)
    • Remaining 20 units to be deducted are taken from Layer 2:
      • Layer 2: 30 units @ $12 each
  3. Updated Cost Layers:
    • Layer 1: 0 units (empty)
    • Layer 2: 30 units @ $12 each

Detailed Breakdown of Actions

  1. Layer Identification:
    • The system identifies Layer 1 as the oldest and Layer 2 as the next in line.
  2. Quantity Deduction:
    • Deduct 100 units from Layer 1:
      • Remaining units in Layer 1: 0
      • Cost of 100 units @ $10 each = $1000
    • Deduct 20 units from Layer 2:
      • Remaining units in Layer 2: 30
      • Cost of 20 units @ $12 each = $240
  3. Cost Calculation:
    • Total cost of sold inventory: $1000 (from Layer 1) + $240 (from Layer 2) = $1240

Placeholder Layer Example

If you try to sell 160 units:

  1. Initial Cost Layers:
    • Layer 1: 100 units @ $10 each
    • Layer 2: 50 units @ $12 each
  2. Selling 160 Units:
    • Deduct 100 units from Layer 1:
      • Layer 1: 0 units (exhausted)
    • Deduct 50 units from Layer 2:
      • Layer 2: 0 units (exhausted)
    • Create placeholder layer for the remaining 10 units:
      • Placeholder Layer: -10 units
  3. Updated Cost Layers:
    • Layer 1: 0 units
    • Layer 2: 0 units
    • Placeholder Layer: -10 units (to track the shortfall)

Summary

When you sell or use inventory, the system deducts quantities from the oldest cost layers first, updates the remaining quantities, and calculates the cost based on the recorded costs in those layers. If there’s not enough stock, a placeholder layer is created to manage and track the discrepancy until new stock arrives. This process ensures accurate tracking of inventory costs and quantities.