Item Application

There are two kinds of inventory postings: quantity and value. Quantity posting describes the change in the quantity in inventory. This information is stored in item ledger entries. Value posting describes the change in inventory value. This information is stored in value entries. One or more value entries can correspond to one item ledger entry.

When you post an inventory transaction, the program records the quantity posting in the item ledger entries, the value posting in the value entries, and then in addition, the program records an item application in the item application entries. In the item application entries, the program creates a link between inventory increases and inventory decreases, to show exactly which inventory increase was used for which inventory decrease (and vice versa). Every time you post an inventory transaction such as an inventory decrease, the program tries to apply that decrease to an existing entry.

An item application entry records the following information:

Inventory Increases

When you post an inventory increase, the program records a simple item application entry without an application to an outbound entry.

Example of item application for an inventory increase

Here is an item application entry created when you post a purchase receipt of 10 items:

Item Ledger Entry No.

Inbound Item Entry No.

Outbound Item Entry No.

Quantity

Posting Date

1

1

0

10

01-01-2007

    

Inventory Decreases

When you post an inventory decrease, the program records an item application entry linking the inventory decrease to an inventory increase. The program does this using the costing method of the item as a guideline. For items using the FIFO, Standard, and Average costing methods, the program uses the first-in-first-out principle, so that the program applies the inventory decrease to the inventory increase with the earliest posting date. For items using the LIFO costing method, the program uses the last-in-first-out principle to link the inventory decrease to the inventory increase with the most recent posting date.

In the Item Ledger Entry table, the Remaining Quantity field shows the quantity that has not yet been applied. If the remaining quantity is more than 0, the Open field contains a check mark.

Example of item application for an inventory decrease

Here is an item application entry created when you post a sales shipment of 5 of the items that were received in the previous example. In this case, the first item application entry is that of the purchase receipt and the second is that of the sales shipment:

Item Ledger Entry No.

Inbound Item Entry No.

Outbound Item Entry No.

Quantity

Posting Date

1

1

0

10

01-01-2007

2

1

2

5

01-03-2007

 

Fixed Applications

You make a fixed application when you specify that the cost of an inventory increase should apply to a specific inventory decrease, or vice versa. This application affects the remaining quantities of the entries, just as the other applications do, but this application also has the effect of exactly reversing the cost of the original entry that you are applying to (or from).

To make a fixed application, you use the Apply-to Item Entry or Apply-from Item Entry fields in the document lines to specify the item ledger entry that you want the transaction line to apply to (or from). For example, you might make a fixed application when you want to create a cost application that specifies that a sales return should apply to a specific sales shipment in order to exactly reverse the cost of the sales shipment. In this case, the program ignores the costing method and applies the inventory decrease (or increase, in the case of a sales return) to the item ledger entry that you specify. The advantage of making a fixed application is that the cost of the original transaction is passed directly to the new transaction.

Example of item application with a fixed application

Suppose that you have the following item ledger entries that record two purchases:

Item Ledger Entry No.

Posting Date

Item Ledger Entry Type

Quantity

Cost Amount (Actual)

3

01-04-2007

Purchase

10

10

4

01-05-2007

Purchase

10

20

 

Now, you want to record a purchase return of the items from the second purchase, posted on 01-05-2007. If the costing method of the item is FIFO, the program will automatically apply the purchase return to the first purchase, giving the purchase return an incorrect cost of 10. To avoid this, you create a fixed application to the second purchase by filling the Appl.-to Item Entry field in the purchase return order line with the item ledger entry number of the second purchase. When you do this and post the purchase return, the program creates the following item application entry:

Item Ledger Entry No.

Inbound Item Entry No.

Outbound Item Entry No.

Quantity

Posting Date

5

4

5

10

01-06-2007

 

The cost of the second purchase will then be passed correctly to the purchase return.

If you create a fixed application for an inventory decrease for an item that uses the Average costing method, the decrease will not receive the average cost for the item as usual, but will instead receive the cost of the inventory increase that you specified. That inventory decrease is then no longer part of the average cost calculation.

If you are working with returns or credit memos and you have set up exact cost reversing in either the purchases and payables setup or the sales and receivables setup, as appropriate to your situation, the program automatically fills these fields when you use the Copy Document function. If you use the Get Posted Document Lines to Reverse function, the program always fills these fields.

Note

If you post a transaction with a fixed application, and the item ledger entry that you are applying to is closed, meaning that the remaining quantity is zero, the program automatically undoes the old application and re-applies the item ledger entry using the fixed application that you specified.

Re-Applications

An item application might at some point be incorrectly posted for one of a variety of reasons, or you may want to change an item application. You might have forgotten to make a fixed application, or you might have made an incorrect fixed application. It might be the case that you want to return an item that a sale has been applied to. Because of the way the unit cost is calculated, an incorrect item application can lead to a skewed average cost and skewed unit cost. To correct an item application, use the Application Worksheet to re-apply an item ledger entry.

Related Topics

Costing Methods

Re-Applying Item Entries



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