Auto Value Adjustments (AVA)

March 12, 2012 in General Ledger,Inventory Control

Auto-Value Adjustments occur when Inventory items move from a negative stock quantity back to zero or to a positive quantity via some form of Stock Receipt (i.e. Purchase Receipt, Manufacturing Receipt, Transfer Receipt, Manual Stock Receipt). Since an Inventory item cannot and does not have a Stock Value when it is in negative, it has no Average Stock Value at that time. if an item that you do not have recorded on the system is sold and goes into negative, the system uses the last known cost for that item for the transaction. This cost is the Replacement Unit Cost – the last cost into stock. When the item is receipted again to a 0 or positive stock value an adjustment is posted for the difference between the Replacement Cost used and the new Stock Value of that Inventory item.

Here’s a simple example:

Quantity Average Unit Cost Replacement Unit Cost Transaction Cost Used Auto-Value Adjustment
1 1.50 1.10 1.50 0.00
0 0.00 1.10 1.50 0.00
-1 0.00 1.10 1.10 0.00
4 2.00 2.00 2.00 0.90
4 2.00 2.00 2.00 0.90

 

In this example, when the item moves to 0 stock, the transaction is costed at 1.50 (the current Average Unit Cost). When the stock moves to -1, the transaction cost is $1.10 (the current Replacement Unit Cost). When the item goes back to a quantity on hand of 4 after a receipt at a unit cost of $2.00 an auto-value adjustment is made for the difference between the Replacement Unit Cost of $1.10 and the new Average Unit Cost of $2.00 (being $0.90) for the quantity that was in negative. This the “Cost of Sale” for the transaction that took the stock to negative is adjust from $1.10 to $2.00 being the new average unit cost of the stock that was receipted.

AVA’s are created automatically by the system (hence the name) and the GL Postings used are taken from the appropriate Product Group for the item in question. The Stock On Hand account is one side of the posting, and the “Auto Value Adjustments” is used for the other side.

This is an essential transaction in order to keep the Stock Valuation in the General Ledger in line with the Inventory Ledger.

Additional examples for consideration.
Transaction Quantity Unit Cost Total Cost Balance Qty on Hand Balance Value on Hand Balance Qty in Store Balance Value in Store
Receipt in Stock 100 10 1000.00 100 1000.00
Invoice -20 10 -200.00 80 800.00
Invoice -50 10 -500.00 30 300.00
Invoice -30 10 -300.00 0 0
Receipt in Store 100 12 1200.00 0 0 100 1200.00
Invoice -5 10 -50.00 -5 -50.00
Receipt in Stock 100 12 1200.00 95 1150.00 0 0
AVA -10.00 95 1140.00 0 0

An AVA occurs when a receipt is made when stock is negative. In the example above, the invoice for qty of 5 has made the Stock On Hand balance negative. The unit cost is assumed to be the last cost: 10.00. However, when the stock receipt is completed, the actual unit cost is 12.00, so if the invoice transaction had of occurred after the receipt transaction, the cost of the sale would have been 60.00 and not 50.00.

In this case, a 10.00 debit is made to AVA and a 10.00 credit to Stock On Hand. This updates Cost of Sales, and has the effect of making the unit cost for the remaining 95 on hand correct at 12.00 per unit.

Note that the cost of sale on the invoice is not updated in retrospect, so that in Sales Analysis, the cost of the sale remains at 50.00.

The best way to avoid this situation occurring is to put procedures and practices in place to avoid stock going into negative.

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