Inventory and costing in SAP Business One

This question was deferred twice: once at the item record in station three, and once at cost of goods sold in station five.

Now it gets answered: at what number is stock valued?

This station is what most distinguishes this product from its price band. Its depth in costing exceeds what anybody reading its price would expect — the consequence of the accounting origin explained at station one.

Measure first: the difference in figures

Valuation methods are not understood from their definitions; they are understood by calculating them. Take one movement on one item:

Movement	Quantity	Unit price
Opening balance	100	10
First purchase	100	14
Sale	120	—

The question: at what value are the hundred and twenty units sold recorded?

Method	The cost calculation	Cost of sales	Remaining stock
First in, first out	(100 × 10) + (20 × 14)	1,280	80 × 14 = 1,120
Moving average	120 × 12	1,440	80 × 12 = 960
Standard cost at 11	120 × 11	1,320	80 × 11 = 880

The gap between the highest and the lowest is 160 on one item and one movement — 12.5 per cent of cost of sales. Multiply it by a thousand items and a full year, then reread any income statement you have ever seen.

That is the whole lesson: the method is not an accounting detail; it is the profit figure.

When each method fits

Method	Fits when	Does not fit when
First in, first out	Prices move and the goods have a shelf life	You want one simple number for everything
Moving average	Movement is heavy and prices are close together	Price jumps are sharp and sudden
Standard cost	Manufacturing — and you want to measure variance	The environment is trading and prices are volatile

The third row carries a condition that gets forgotten: standard cost produces variance, and variance without periodic review accumulates until stock is a number with no relation to reality. Choosing it is a commitment to reviewing it, and anybody who will not review it should not choose it.

The more important rule: the method is chosen once, and changing it on an item that has movement is not switching a field — it is a revaluation with an accounting effect, which is why it was written into station three among the three questions asked before any field.

The perpetual inventory decision — taken before you understood it

When the company database was created, a decision was taken about whether the stock account in the general ledger is updated with every movement or periodically.

Its effect shows up here:

With perpetual inventory: every receipt and every delivery writes to the ledgers immediately, and the stock account on the balance sheet equals the value of stock at any moment.
Without it: the ledgers do not move with the goods, and cost is computed at period end by a count and a manual calculation.

The first is the correct position for any company with real stock, and it is what makes the inventory report and the trial balance state the same number — the reconciliation you are asked for the first time an auditor opens your file.

That decision was made at station three, when you did not yet know what it meant. This is not a passing remark; it is a precise description of the most dangerous thing about this product: decisions taken on day one whose effect appears in month six.

Batches and serial numbers

A batch covers a group of units sharing a production or expiry date; a serial number covers a single unit tracked in its own right.

Choosing them is an operational decision, not an accounting one: the first is forced on you by pharmaceuticals, food, or any product with an expiry date; the second by equipment carrying a warranty.

Their real cost is not in the setup; it is in the daily discipline. The system will demand the batch at every receipt and every delivery, and anyone enabling it without operational discipline stops their operation at the first employee in a hurry — then asks for it to be switched off a month later, by which point movement has been posted against it.

The rule: enable it because compliance requires it, or do not enable it. “We might need it later” is not a reason.

The physical count — and its difference

A count compares what is in the warehouse with what is in the system, and the difference is posted as an entry.

The difference is usually not a system error; it is damage never recorded, a receipt posted for goods that never arrived, a delivery that left with no document, or a unit-of-measure error — and that last one takes you back to the conversion factors you were warned about at station three.

Read the difference as a report on your operational discipline rather than as an error to be cleared. Anybody who clears the difference without asking what caused it will clear it once a quarter for ever.

What you actually do at this station

Create three items under the three methods, and put the movement above through them literally.
Calculate the figures by hand first, then compare them with what the system shows. The order is deliberate — anyone who looks at the screen first justifies its number rather than verifying it.
Open the inventory audit report for the three items and explain every line in it.
Run a physical count with one positive and one negative difference, read the adjustment entry, and write a plausible cause for each difference.
Enable batches on one item, run a full purchase and sales cycle through it, and record how many extra steps it cost you.

The three commonest errors

One: choosing the method without calculating. It is chosen because it was the default or because somebody said so, then a year later somebody asks why the margin is not what was expected.

Two: enabling batches everywhere. It looks professional, and it ends with an employee hunting for a batch number to get an urgent shipment out.

Three: clearing count differences without analysis. The difference is information, and anybody who erases it buys a clean balance at the price of not knowing why.

What the valuation method does to reading a company’s numbers is set out in the SAP Business One guide, and the general logic of inventory and costing — independent of any product — is in the inventory and costing cycle.

The acceptance test for this station

Calculate the example above under all three methods on paper, and produce the six figures with no system.
Explain when each method fits, and what commitment standard cost imposes.
Explain perpetual inventory and its effect on the inventory report matching the trial balance.
Run a count with a difference and read its entry, then write three plausible causes.
Run a full cycle on an item with batches, then decide: would you have enabled them if the decision had been yours?

What comes next

You know where the numbers come from. The next station assembles them: the close and reports — reconciliations, period closing and the statements — and with them the skill described at station one as the fastest thing that makes you useful: writing a query that produces a report nobody had.