Valuation and Cost Layers

Knowing how many you have is only half the question. Valuation answers what they are worth, and what an issue cost you.

FIFO layers

Receipts create cost layers — this many units at this cost, received on this date. Issues consume the oldest layer first, and record what they actually consumed. If an issue spans two layers because the first was exhausted part-way, the cost reflects both.

Why the issue stores its cost

Because it makes margin permanent. An issue that recorded what it consumed at the time will report the same margin next year. An issue valued by looking up a cost at report time will report a different margin every time the cost changes, which means the reported profit on a historical sale is not a fact but a function of when you asked.

This is the same reasoning as storing three currency amounts on a ledger line, and as storing a bill rate on a time entry. A figure that describes a past event should be captured when the event happens.

What this gives you

• A stock valuation that ties to the movement history rather than to a separate calculation.
• Cost of sales per document, and therefore margin per line, order and customer.
• The ability to explain a margin figure by pointing at the specific layers an issue consumed.

Getting opening costs right

Opening movements need realistic costs, not zero. A zero-cost opening layer produces spectacular margins until it is exhausted, and those figures will be reported before anyone notices. Take the cost from your previous system.

Adjustments

A stock adjustment changes quantity, and therefore changes value. Decide the cost basis for adjustments deliberately — writing stock off at zero and writing it back on at zero will balance the quantity while quietly destroying the valuation.

Posting to the ledger

Where stock movements post to the general ledger, valuation is what supplies the amount. Confirm the accounts before going live: getting the quantity right and the value posted to the wrong account is a reconciliation problem that surfaces at the worst moment, which is close.