COST OF GOODS SOLD
❖ Cost of Goods sold [COGS] refers to the cost of producing or purchasing goods or
services.
❖ COGS helps in determining company pricing and gross profit.
❖ The COGS account is not an expense account but it functions as an expense
account.
Gross Profit = Net Revenue – COGS
➢ To set up COGS Account:
• We can individually set the COGS account under the Accounting tab in the Item
records.
• We can also set the default COGS account by navigating to Setup -> Accounting ->
Preferences -> Accounting preferences. The default COGS account setting is available
under the Items/Transactions tab.
The above changes do not affect the existing inventory or reports.
➢ Item cost is determined at the time of:
• Item Receipts
• Standalone Vendor bills
• Inventory adjustments
The exact cost assigned to an item depends on the costing method chosen.
COSTING METHODS
The costing method is set up under the Purchasing/Inventory tab in the Item record.
The costing method can also be set in Accounting Preferences under the
Items/Transactions tab. Average costing is the default costing method in most accounts.
After the Item record is saved, the costing method cannot be changed.
The different costing methods are:
• Average [moving average] method – Total value of item/ total quantity of an item
• Group average method
• FIFO
• LIFO – is not available in all NetSuite editions
• Standard
• Lot Numbered – available for the lot-numbered item type
• Specific – available for the serialized item type
Standard and Group average methods will only be available after enabling the
corresponding features.
SYSTEM COGS ADJUSTMENT
• Generally, when an item sold is in stock, NetSuite reduces the total inventory asset
account and increases the total COGS Account.
• When an item sold is not in stock, NetSuite makes the adjustment to the On-hand
value of the item.
• Underwater sales – selling an item when the data shows that the item is not in
stock. When the on-hand quantity of the item is below zero, it is said to be in an
underwater state.
• Estimated COGS [when out of stock] – actual cost of item [when added back to
stock] = COGS Adjustment Amount
• Estimated COGS is based on historical data. Only when historical data is
unavailable will it consider the cost entered.
• In the Inventory costing preferences setup, select a method for inventory valuation
when Inventory levels are less than zero.
These preferences apply only to items with costing methods FIFO, LIFO, lot-numbered and specific method
• When transactions are entered on the same date, they are considered by
transaction type in the following order [for the purpose of Inventory count]:
1) Inventory adjustment worksheets (First-in-day)
2) Purchase transactions
3) Assembly builds, component builds, transfers, and transfer orders
4) Vendor return fulfilments, assembly unbuilds
5) Sale transactions
6) Return transactions
7) Inventory adjustment worksheets (Last-in-day)
Note that NetSuite considers increases in inventory before it considers decreases to
inventory.
INVENTORY COSTING PREFERENCES
Scheduling Inventory costing is a preference to schedule when inventory costing is
initiated.
The Schedule inventory costing options are Every Hour and Based on Custom Schedule.
Based on a custom schedule set, when a transaction is entered, the
transaction is saved and the item uses Average Costing for that point in time before
showing the correct cost after the schedule.
COGS RECALCULATION
An adjustment to correct inventory costing values that enable accurate costing data to be
maintained when transactions are inserted into or removed from an existing series of
transactions
• Transaction changes that do initiate an inventory costing recalculation include
changes in the following:
o item
o item quantity
o unit price
o serial or lot numbers
o date
o order total
o taxes charged
• The recalculation status is displayed in the Item records under the Cost Accounting
status column
• The same can be assessed by creating an Item Search with Location Cost
Accounting Status as Criteria filter
• Similarly, we can see the recalculated figures in the Inventory Valuation detail
report. On checking the Display Title, the pending status will be mentioned in
the title.
Note: Items using FIFO or LIFO costing method are also displayed in the
inventory adjustment worksheet but the recalculation will be done on average
method basis.
BEST PRACTICES
• Avoid underwater sales
• Avoid backdating transactions
• Avoid deleting transactions
• Avoid re-opening previously closed periods
• If re-opening a closed period cannot be avoided before you close the
accounting period again, verify that the recalculation is complete
• Run Inventory valuation report