Inventory Accuracy: Counting, Adjustments, and Costing
Inventory Accuracy: Counting, Adjustments, and Costing
This domain tests how you keep on-hand accurate and how inventory value is calculated. The exam covers cycle counts, physical inventory, adjustments, cost methods, and cost profiles.
Core rules
- Cycle counts count a subset of items or locations on a schedule; physical inventory counts a broader scope, often with a freeze. Counts generate count entries and, after approval, adjustments.
- Adjustments correct on-hand quantity and must use a reason. Approval may be required based on setup.
- Cost methods include Standard, Average, FIFO, and LIFO. The cost profile determines the method and cost organization. Standard cost uses predefined costs; average cost recalculates with receipts.
- Cost adjustments and landed cost change inventory value. Period close processes transactions and cost before closing the inventory period.
Worked example
A cycle count for item A in locator L1 shows 95 units on hand versus 100 in the system. You approve a -5 adjustment with reason Cycle Count Variance. Under average cost, the adjustment reduces inventory value by 5 times the current average cost. The reasoning: the quantity adjustment changes on-hand immediately; the cost processor values the adjustment using the item's cost method. If the item were standard cost, the adjustment would use the standard cost, not a recalculated average.
Traps
- Adjusting quantity without a reason or approval, which can fail audit and approval rules.
- Counting without freezing or controlling movement, producing a count that is already stale.
- Assuming a cost method change is retroactive; it affects future transactions and may require cost adjustment.
- Closing the inventory period before all transactions and cost processor runs are complete.