How and When to Use Different Costing Methods for the Same Item
Once products are sold, the revenue needs to recognized, as does the cost of goods sold (COGS). Generally, that involves using the standard costing method. Many products that have been sold may come back in for regular maintenance and services, which can be preventive or corrective in nature. If a product is a customer asset or is under warranty when a business provides after-sales services and the products are received through a return merchandise authorization (RMA), the standard cost cannot be applied because that would affect the overall inventory valuation in Asset Sub-inventory. This problem becomes more pronounced when a business receives customer-owned products which are not under warranty. In that case, products must be entered as “zero cost.”
As a result, it is important to understand how to segregate such products from new products to avoid these adverse effects. The following scenarios show the reasons for using different costing methods and their potential impact on inventory valuations.
Products under warranty
These products can be replaced with new products and can then be refurbished later. The cost of the warranty product can be predetermined — for example, 50% to 60% of the value of the new product.
Non-warranty products
These products either never had a warranty or no longer have a valid warranty and are now solely owned by the customer. If they are received in the asset sub-inventory, the standard cost will be applied, and the inventory valuation will diminish as a result. However, if the products are received in the expense sub-inventory; the nature of the transaction will be changed from asset to expense. For these expense items, the sub-inventory can be “warranty.” For customer-owned products, which must also be an expense, the sub-inventory can be a “customer asset.” In these cases, the item cost profile for the expense transactions must follow any costing method other than the standard costing method, including average or actual.
Return Merchandise Authorizations
If you create an unreferenced RMA order with “receive the product at RMA price,” the product cost will become the RMA price on the sales order. As a result, the cost of the product changes. While a warranty product may have some cost (a percentage of the RMA price), it can be refurbished later and can be sold separately. The new product can be issued to the customer as a product under warranty. A customer asset, on the other hand, can be received at zero cost.
In short, each item must have two cost profiles: an asset profile based on a standard cost and an expense profile, which can be based on average or actual cost.
The nature of the transactions changes as follows:
| Item Name | Inventory Asset Flag | Sub-inventory Type | Nature |
| Item A | Yes | Yes | Asset |
| Item A | Yes | No | Expense |
| Item A | No | Yes | Expense |
| Item A | No | No | Expense |
Selecting the Ideal Costing Method
Here are the best practices for determining and using the proper costing method:
- Create the item
- Make sure the “Item Inventory Asset Flag” is “yes”
- New products must be in the asset sub-inventory
- Customer assets must be in the expense sub-inventory
- Warranty products must be in the expense sub-inventory
- Each item must have asset and expense cost profiles
- The asset cost profile must have a standard cost
- The expense cost profile must have an average cost
- Use standard cost for new items
- The expense profile must have an “unreferenced RMA receipt cost” based on the price on the RMA order
If warranty products require replacement, send the new products from stores. The warranty products can then be refurbished and completed in the refurbished asset sub-inventory. A new standard cost can be assigned at that point.
For non-warranty items, simply receive the products into the customer asset sub-inventory with RMA prices as zero. Then create a maintenance work order, complete the work order by addressing the product issue, and ship the product back to the customer.
Either way, you can use different costing methods and have no adverse impact on your inventory valuation.
Inspirage can help
As the Integrated Supply Chain Specialists, with recognition from Gartner, IDC, and winners of Oracle’s 2021 Game Changer Award for SCM Service Delivery Partner of the Year, Inspirage is uniquely qualified to be your success partner. Whether you are upgrading your on-prem system or have decided to move to the cloud where continuous improvement is built-in, our team is prepared to guide you on your transformational journey.
