What is the last cost of an inventory item?

As with most other accounting software packages that provide inventory management capabilities, Advanced Accounting keeps track of the "last cost" of inventory items yet what really means is not as simple as it sounds.

As an overall costing method, Advanced Accounting uses moving average cost.   Other systems may offer additional options in terms of how inventory value and cost of good sold is calculated.  But often users want to use "last cost" as a metric to help determine future pricing especially in a world of constantly changing costs.

The last cost however as tracked by Advanced Accounting and other accounting packages may not necessarily inform managers as to how the absolute latest costs should impact the setting of sales prices and/or at the very least can be misunderstood.  

Inventory cost information provided by Advanced Accounting includes:

• Average cost  (both by location as well as for all units i.e. total blended average cost)
• Last cost (last saved or processed cost by location, by vendor and for all locations)
• Supplier cost (also referred as "catalog cost" i.e. the next cost based on pricing information provided by the supplier)
• Inventory movements (chronological detail of all costs processed against a part or part-location)

Costs, including last costs, are updated as each incoming transaction occurs based on  primarily purchases and any adjustments.  When inventory is sold, it is the item's average cost that is used to calculate the cost of goods sold and the reduction of the item's inventory asset account in the case of a sale.  Average cost is used also in connection with inventory transfer situations (one location to another or to a different part code) and for bills of material calculations.  Last cost also is tracked not for accounting transaction posting but rather for general reference.

Some systems refer to the "most recent" cost.which includes additional costs and taxes processed against that receipt.  This however will still not necessarily tell end users what they want to know as the word "recent" (meaning happening a short time ago) often may not actually be the most recent chronologically processed cost.

In Advanced Accounting, last cost (at the overall item, location, or vendor level) means the last time that a transaction was processed in the system against that item (i.e. product code or SKU) but it does not mean that cost occurred necessarily on the most recent date nor that it happened just a short time ago.  Timing is everything:  both in terms of when items are received, when vendors provide final invoices which often involve transactions dated prior to the last receipt date, and when transactions are physically entered into the accounting system.  If the person who normally processes purchase order receipts is not available due to illness or some other reason, last cost will be dependent on when those purchase orders are ultimately processed, and in what order.  So, last cost may not for a number of reasons  be the most recent calendar date transaction.  It might instead relate to costs on a vendor invoice dated several weeks prior or much longer than when the items were physically received.

So managers can be easily misled by just looking at last cost values.

Last cost (and average cost) can also be temporarily moderately to greatly skewed based on "best guess costs" processed on partially received items (when you don't necessarily know what the vendor will be charging for an item or in the event of a sudden price increase or a special one-time discount that lowers the price, but the stock has been received and needs to get into inventory as quickly as possible) and that could then also change later (but might then relate to an older dated vendor invoice when the vendor shipped the goods prior to their being received) based on the vendor's actual invoiced cost. 

So "last cost" does not mean the very latest "most recent" cost but rather the last cost as processed in the program that could involve older dated invoices or based on when staff is available to process transactions, etc.  

This is also why we are always concerned about sales prices being solely based on "cost" that can be quite plastic absent very close monitoring.  While it may be appropriate in some industry environments, "cost plus" pricing is fraught with perils and is also why we provide a "floor price" in  Advanced Accounting to help ensure that an item can't be sold for less than a certain amount.  But this requires a high degree of oversight to provide the type of controls that inventory management requires.  You may be given a large discount on a purchase due to a vendor promotion or because of your buying history and/or loyalty to a particular vendor.  Does that mean your customer pricing should be immediately lowered?  You may also have a temporary increase in prices that you could decide to "hold the line" to retain your long term customers. 

So there can be factors that are much more important than just the most recent or "last" costs.  Using the vendor's most recently published "catalog" pricing is a better solution or when that isn't available, diving into the inventory movements of an item to determine trends based on what the actual latest (which are not necessarily the "last") costs processed have been for a given product.