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Lot-Numbered & Serialized Costing Methods

NetSuite provides the ability to track lot numbers and serial numbers per item. This is extremely useful for businesses that need to assign specific lots for batches of inventory manufactured or when tracking expiration dates per lot. 

For lot-numbered and serialized items, there are also several costing methods to choose from when setting up inventory items. This post will describe the impact of the following costing methods to choose from:

  • Average
  • Lot-Numbered
  • Specific

Average Costing

Average costing is the simplest to understand and can be used for serial and lot-numbered items. After any transaction is created that affects inventory, the total quantity and inventory value is summed for each item, where the average cost per unit can be derived. When the next transaction for this inventory item is posted to the GL, the inventory will be valued at the average cost per unit prior to the transaction was created.

Average costs are calculated per item per location. For lot-numbered and serialized items, the average cost is NOT calculated per lot/serial number. If inventory is purchased at different prices across different lots/serial numbers within a single location, the cost per unit is averaged across all lot/serial numbers within that location. Therefore, the next transaction to consume a unit from any of those lot/serial numbers would be valued the same.

For example, let’s say we have “Lot Item A” and enter the following item receipts:

  • Receipt 1 = 100 units @ $3.00/each into Lot #0001
  • Receipt 2 = 150 units @ $2.00/each into Lot #0002
  • Receipt 3 = 250 units @ $2.50/each into Lot #0003

The inventory valuation after these receipts would be 500 units @ $1,225.00, which equates to an average of $2.45 per unit. This means that any sale for this item will then be valued at this rate, regardless of which lot it comes from.

Let’s say that the following quantities of Lot Item A were fulfilled from each lot - the GL Impact would reveal that each batch is still valued at $2.45 per unit:

  • Sale 1 = 15 units fulfilled from Lot #0001 → valued at $2.45 per unit
  • Sale 2 = 40 units fulfilled from Lot #0002 → valued at $2.45 per unit
  • Sale 3 = 28 units fulfilled from Lot #0003 → valued at $2.45 per unit

Overall, this is a great costing method for companies that need the ability to utilize lot tracking, but prefer to keep costing calculations as simple and transparent as possible.

Lot-Numbered Costing

As one would expect, the lot-numbered costing method is only available to lot-numbered inventory items. With this method, the inventory value is maintained per lot number per item per location. Inventory will be valued according to the purchase price per lot number and the gross profit can be different when a sale depletes inventory from each lot number.

For example, let’s use “Lot Item B”, which is an inventory item that uses the Lot-Numbered costing method. Similar to the above scenario, we’ll also use the following item receipts:

Let’s say that the following quantities of Lot Item B were fulfilled from each lot - the GL Impact reveals that the inventory is valued according to the receipts specific to each lot:

 

It is important to note that within any lot number, inventory calculations follow the FIFO costing method. To demonstrate this, let’s add another receipt into Lot #0001 at a different item rate (after the previous receipt and sale):

  • 85 units @ $3.00/each in Lot #0001
  • 100 units @ $4.00/each in Lot #0001

Upon fulfilling the rest of this inventory, the first 85 units will be valued at $3.00 each, and the next 100 units will be valued at $4.00 each. Viewing the GL Impact page will confirm these calculations:

Although lot-numbered costing is not as consistent as average costing, it allows companies to maintain costs within each unique lot number. This ultimately allows companies to track profitability per lot number and identify cost variances between different lot numbers.

Specific Costing

Lastly, the specific costing method is only available to serialized inventory items. Similar to the lot-numbered costing method, the inventory value is maintained per serial number per item per location.

Serial numbered items can only have one unit per unique serial number, so there’s no elaborate costing calculations to be done per serial number. In a standard item life cycle, there are only 2 transactions - the receipt and sale of a serial number. The serial number will be valued according to the receipt, and the subsequent sale will then also be valued at that same cost.

Just like previous examples, we can easily demonstrate this with a simple receipt and sale in NetSuite. For “Serial Item C”, let’s receive a unit for 3 serial numbers with 3 different costs:

  • Receipt 1 = 1 unit @ $2.75/each with Serial #A001
  • Receipt 2 = 1 unit @ $4.50/each with Serial #B002
  • Receipt 3 = 1 unit @ $5.25/each with Serial #C003

And after subsequently fulfilling this serialized inventory, each serial number will maintain their original cost at the time of the sale:

Specific costing for serialized items is analogous to Lot-Numbered costing for lot items. It will allow companies to track costs specific to each serial number and calculate their respective profitability.

The costing method employed by a company is usually clearly defined, with the decision of which costing method to use commonly determined by the accounting and administrative teams of an organization. However, NetSuite offers the flexibility to use a variety of costing methods with pros and cons to each.

Reach out to the Techfino team to learn more about these and your other NetSuite needs!

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