Getting started with cost of sales

There are a number of settings in Sage 200 which let you choose how, when and where to post cost of sales.

You can choose to post cost of sales to your nominal accounts in different ways, depending on how you use cost centres and departments for analysing your income and expenditure. Nominal accounts always contain a unique account number but can share the department and cost centre with other accounts.

The value of the postings depends on how costs are calculated for your stock items.

Set up for cost of sales postings

The following settings determine the nominal accounts you post to, when the values are posted and whether cost of sales values posted automatically:

  • The Default Accounts tab in Sales Order Processing Settings.

  • The Processing tab in Sales Order Processing Settings.

  • The Options tab in Stock Control Settings.

Choose the nominal accounts for cost of sales postings

Open: Sales Order Processing > SOP Utilities > System Set Up > SOP Settings | Default Accounts.

  • Use this to choose whether to amalgamate the account number in the Stock issues account or the Asset of stock account set up on the stock item, with the cost centre and department code used by the revenue account.

    • Select Stock Issues Account if you want the costs of issued items to be posted to the same cost centre and department as the revenue posting, so that the profit for each cost centre and department can be analysed.

      If you don't select this option, the cost centre and department from the stock item issues account is used for the cost of sales posting.

    • Select Asset of Stock account if you want the value of the issued stock to reduce the Asset of Stock for the same cost centre and department as the revenue posting.

      If you don't select this option, the cost centre and department from the stock item stock account is used for the asset of stock posting.

      Note: As the Asset of stock account should be a Balance Sheet account, this will only have an effect if you have chosen to Split postings between cost centres for balance sheet accounts.

Note: If you select these you must ensure that you have valid nominal accounts for the account number plus all possible cost centre and department combinations. Otherwise, the postings may go to the suspense account.

Choose when to post values to nominal accounts

Open: Sales Order Processing > SOP Utilities > System Set Up > SOP Settings | Processing.

  • Use this to choose when and how your stock records are updated for goods despatched through Sales Order Processing.

    • Select Order despatch is confirmed to calculate and post the cost of the items to the Cost of Sales and Asset of Stock accounts associated with the stock item, as soon as the items are despatched.

      Stock is updated immediately, updating the stock valuation. However, if the invoice for the order is not posted for some time after despatch, the costs and revenues for the order may end up in different accounting periods.

    • Select Invoice is posted to update the stock system when the SOP invoice is posted to the Sales Ledger. The Nominal postings and stock system are not updated until then.

      This ensures that revenue and the costs from the order are posted in the same accounting period. However, it means that your stock valuation will not reflect the issued stock as soon as it is issued, but only once the SOP invoice is posted.

      If you select Invoice is posted, you can also select Use invoice date on stock history so that the stock history reflects the date the stock was updated rather than the date the stock was actually issued. This may affect the retrospective stock valuation report.

Choose if costs of sales are posted automatically

When SOP orders are processed they update the stock system for the items issued. The stock system is updated, either as the goods are despatched (Order despatch is confirmed) or as the invoice is posted (Invoice is posted), depending on your selection on the Processing tab in SOP Settings.

Open: Stock Control > Utilities > System Set Up > Stock Control Settings | Options.

  • If you select Generate cost of sales postings for SOP, the value of the items issued is calculated according to the costing method specified for the stock item, as SOP updates the stock levels. This helps to keep the value of stock held in line with the Asset of Stock account in the Nominal Ledger and ensures that the Cost of Sales is accurate.

    To calculate the exact cost of this stock after it has been issued may not be possible as Sage 200 may have updated the average or standard cost. For FIFO and Actual cost items, once the stock is moved the costs are no longer known.

    So using this option is the best way to ensure the nominal ledger is updated with accurate cost of sales figures and the Asset of Stock is kept in line.

    If you don't select this option, the cost of the stock movements must be calculated manually and posted to the Asset of Stock and Cost of Sales nominal accounts using a manual journal.

Other settings which have an effect on cost of sales

There are other settings which affect your cost of sales postings: your choice of product group costing method; whether you allow negative stock; and whether you allow unconfirmed stock to be issued to sales orders. These are set up in the following areas:

  • The Details tab in the stock Product Group.
  • The Order Processing tab in Purchase Order Processing settings.

Choose how the value of your stock items is calculated

Open: Stock Control > Stock Maintenance > Product Groups | Details.

Select the Costing Method for the product group from the drop-down list.

The costing method is set for the product group, and you cannot set a costing method for individual stock items.

The costing method is used to calculate:

  • The cost of sales (profit) made on a sales order when you sell stock.

    Note:

    In order to avoid restricting business operations, Sage 200 supports the sale of goods before their cost is known.

    There can be significantly different cost of sale values for the same sequence of purchases and issues depending on the costing method used.

    • In the case of Standard costed items, the cost of sales is calculated using the standard cost at the time of the sale. This is not adjusted when the actual cost becomes known.
    • In the case of Average costed items, the cost of sales is calculated using the average cost at the time of the sale. This is not adjusted when the actual cost becomes known.
    • In the case of Actual costed and FIFO items, the cost of sales is calculated using the average cost at the time of the sale. This is adjusted when the actual cost becomes known.

  • The value of the stock you currently hold.

  • The value of transactions that are posted to stock asset nominal account when you buy stock.

  • If you are using Manufacturing, the cost of stock items issued to works orders.

    Note:

    In order to avoid restricting business operations, Sage 200 supports the issue of components to works orders before their cost is known.

    There can be significantly different values for the cost of finished goods for the same sequence of purchases and issues, depending on the costing method used for the components.

    • In the case of Standard costed items, the issue cost is calculated using the standard cost at the time of the issue. This is not adjusted when the actual cost becomes known.
    • In the case of Average costed items, the issue cost is calculated using the average cost at the time of the issue. This is not adjusted when the actual cost becomes known.
    • In the case of Actual costed and FIFO items, the issue cost is calculated using the average cost at the time of the issue. This is adjusted when the actual cost becomes known and the works order is closed. Works orders can only be closed when all costs are known.

You can choose from the following costing methods:

FIFO (First in, first out) costing method

The FIFO costing method uses the oldest price paid for the stock item until all stock bought at that price is used. Then the next cost price is used.

The cost price of an item is updated when the goods are confirmed. This happens when goods are recorded as received in Sage 200 and the cost price is known.

  1. You buy 10 items at £10 each.

  2. You buy an additional 5 items at £15 each.

    You now have 15 items in stock.

  3. You sell 7 items.

    The cost price of these items is 7 items x £10 = £70.

  4. You sell the remaining eight items.

    The cost price of these items is (3 items x £10) + (5 items x £15) = £105.

Standard costing method

The Standard costing method uses the Standard cost price specified on the stock item record Details tab. The standard cost price can be changed at any time on the stock item.

Each time you change the standard price of an item, it is recorded in your Sage 200 database. This is used to calculate the value of your stock retrospectively.

Standard costing is useful if you want to value your stock consistently, disregarding the variability of the price you actually pay for it. It can also be used if you need to account for additional costs associated with an item. For example, stock items that are bought in and have some type of processing done to them before they are sold.

Average costing method

The Average costing method uses the average buying price of the items currently in stock.

The average buying price is calculated in the following way:

((Current Total Qty in Stock * Current Average Buying Price) + (Quantity Brought In * Price Brought In) )/ (Current Total Qty in Stock + Quantity Brought In).

The average buying price is updated when a purchase order for an item is recorded as received with a known cost price, or a return is recorded as despatched. It is not updated when goods are sold.

  1. You buy one item at £10.

  2. You sell this item.

  3. You buy a second item at £15.

  4. You buy a third item at £20.

The average buying price is the average cost of the second and third items: (one item x £15) + (one item x £20) / 2 = £17.50.

Sometimes it is not possible to update the average buying price of the goods. This can occur if the cost price of the goods is updated when the invoice is recorded, and you have a stock level of zero for an item. If you then receive and sell goods before entering the purchase invoice, Sage 200 cannot update the average buying price as the stock level is still zero.

In this case, Sage 200 uses the cost price of the goods on the purchase invoice as the average buying price.

  1. You have a stock item with a stock level of zero. The last time the item was purchased the average buying price was £5.

  2. You buy ten more items at £8 each.

  3. You record the receipt of the goods in your warehouse, but you do not record the purchase invoice. The cost price of the goods is not confirmed.

  4. You sell all ten of these goods. Your stock level is now zero.

  5. You enter the purchase invoice and confirm the price of the goods.

Sage 200 cannot work out the average buying price in the usual way because (ten items x £8) / 0 = 0.

In this case, the average buying price is updated to £8. This is the cost price of the items just purchased.

Note: To make sure the average buying price is always up to date, we recommend that you choose to update your cost prices when the Goods are received rather than when the Invoice is recorded. You can set this in POP Settings on the Order Processing tab. See Order processing (POP settings).

For more information, see Questions: Average buying price.

Actual costing method

The Actual costing method can only be used with traceable stock items. This uses the price paid for an individual item when it is confirmed and the cost price is known.

For stock items that use actual costing, we recommend that you choose to Update prices when goods are received, rather than when the Invoice is recorded. You can set this in POP Settings on the Order Processing tab. See Order processing (POP settings).

  1. You buy five items at £5 each. They have serial numbers 1 - 5.

  2. You buy another three items at £8 each. They have serial numbers 6 - 8.

  3. You sell three items with serial numbers 1, 2 and 6.

The cost price of these items is (two items x £5) + (one item x £8) = £18.

Changing the setting

The Costing Method setting cannot be changed once there are items linked to the product group.

Allow negative stock

Open: Stock Control > Stock Maintenance > Product Groups | Details.

If you select Allow Negative Stock on the stock item product group Details tab, then there are implications for postings when using a costing method other than Standard.

  • Asset of Stock postings for issues of negative stock.

    The true cost of these items cannot be known, as this is only recorded when items are added into stock. The average cost price is used on the nominal postings to the Asset of stock for negative items. When items are added to cover these negative amounts the true cost may be different. At that point the difference will be posted to the Asset of stock. However, this adjustment may be posted into a different accounting period than the original posting.

  • Cost of Sales postings for issue of negative stock.

    Again as the cost of the items is unknown, the average cost is used to post to the Cost of Sales. When the goods are received and the true cost known, any difference is posted as an adjustment to the Cost of Sales. This adjustment may be posted into a different accounting period than the original cost of sales posting.

Allow stock with unconfirmed value to be issued to sales orders

Having unconfirmed stock has implications for cost of sale postings if the stock is issued to sales orders.

Open: Purchase Order Processing > POP Utilities > System Set Up > POP Settings | Order Processing.

  • If you select Allow prices to be updated when goods are received, then the quantity of stock is added in Stock Control and the purchase order price is used to update the value. The cost of sales is posted immediately, based on the purchase order price.

    When the purchase invoice is recorded and the true cost known, the purchase value using the purchase order price is posted to the nominal. Any difference in value between the purchase order and the invoice price is posted to the Differences account you choose.

    Stock is always valued at the purchase order price. This means stock issued to sales orders always has a confirmed value, avoiding the need to post adjustments to the cost of sales postings. However, if the invoice and purchase order prices vary, this may mean you over value or under value your stock.

  • If you don't select Allow prices to be updated when goods are received, and leave it clear, then the quantity of stock is added in Stock Control but with an Unconfirmed value. The cost of sales is posted immediately, based on the standard or average cost of the stock item.

    When the purchase invoice is recorded and the true cost known, an adjustment to cost of sales will be posted for any difference in value.

See also

Steps in this task

Default accounts (SOP settings / Invoice and order settings)

Processing options (SOP settings / Invoice and order settings)

Options (stock settings)

Product group details

Order processing (POP settings)

Reference

Using cost centres and departments with nominal accounts

Retrospective stock valuation report