When will D365FO take the marked Cost of goods sold (COGS) in sales orders?

Inventory valuation in D365FO (or AX), it is an interesting topic! First of all: always make sure you understand the basic principles, like the running average cost price before deep diving in the other options. A lot of settings can affect the behavior of inventory valuation, but knowing the basic principles is a must to not get lost.

In this article I share about marking purchase and sales orders and the moment when the marked cost of goods sold is used in sales orders.

What is marking?

By the most inventory valuations, the value of issues of articles will be calculated based on the inventory valuation method during inventory revaluations / closings. During these processes the definitive value of inventory issued and inventory value in warehouse is calculated based on the earlier posted purchase price(s) where the issues will be linked to. For example FIFO (First in, First out):

First Purchase 1 piece for EUR 1,-

Second Purchase 1 piece for EUR 5,-

First Sales, cost of goods sold will be EUR 1,- (because the First in, First out principle will link the purchase value of the first purchase (First in) as cost of goods sold in the First sales (First out).

When marking, you skip the chosen valuation method and you link the cost of goods sold of the issue directly to a purchase value. This means that the linked purchase value will be used as cost of goods sold in stead of a calculated amount based on the inventory valuation method.

When will the marked price be used as COGS (Cost of Goods sold)?

There are two influences on the moment of using the marked price as COGS for sales orders:

1. Is the field 'Include physical value' in the Item model group selected or not?

2. Is the marked purchase order line already invoiced or not?

If the field 'Include physical value' is not selected in the item model group of the item, the cost of goods sold based on the marked purchase order will be taken from the moment the purchase order line is invoiced.

If the purchase order is received, the running average cost price will be taken as cost of goods sold value when the sales order line will be delivered or invoiced. After posting the purchase order invoice, during the next inventory revaluation or inventory closing an adjustment will be made to make the cost of goods sold be the marked cost price.

If the field 'Include physical value' is selected in the item model group of the item it works different. The cost of goods sold of the marked sales order delivery or invoice posting will be taken directly from the marked purchase order line. In that case the running average cost price is not used. In this case it doesn't matter if the purchase order line is received or invoiced.

I will show both outcomes based on examples related to inventory valuation method 'Weighted average'.

Include physical value is not selected, purchase order invoice is posted before posting sales order invoice

I create a purchase order with a value of USD 1,75 and receive and invoice the purchase order.

The running average cost price of item after this purchase order invoice is USD 25,56:

I create a sales order and mark this immediately to the purchase order:

Now I post the sales order invoice. The COGS is USD 1,75 which is the marked purchase price and not the running average cost price of USD 25,56:

Include physical value is not selected, purchase order invoice is posted after posting sales order invoice

I create a new purchase order again for this item, now for USD 3. I only receive this purchase order:

Again I create a sales order and mark this with this purchase order. When I invoice the sales order, not the marked price of USD 3 is taken but the running average cost price of USD 33,50:

Now I invoice the purchase order with a value of USD 3. After the first inventory closing a adjustment is created for USD 30,50 (the running average cost price of USD 33,50 minus the marked cost price of USD 3):

So when in the item model group the field 'include physical value' is not selected, the marked price will be taken directly as cost of goods sold when the purchased item is already invoiced.

If the purchased item isn't invoiced, the running average cost price is taken. After invoicing the purchase order at the next inventory revaluation / closing, an adjustment will be made to make the cost of goods sold equal to the marked purchase price.

Include physical value is selected

Now I used an item with an item model group where the field 'Include physical value' is selected.

I create a purchase order with purchase price USD 1 and only receive this purchase order:

The running average cost price of the item is USD 24,63:

I create a sales order and mark this Mark sales order after receiving the goods.

Now I post the packing slip of the sales order. Already the marked purchase price of USD 1 is used (and not the running average cost price of USD 24,63):

Also after invoicing of the sales order this marked purchase price is used as cost of goods sold.