As you work to implement a new GIS-based asset and work management system (or improve your current system), a key component that often gets overlooked is the current value of all inventory on hand.
With such a strong focus on GIS assets, sometimes this critical component gets left behind. However, every time a Work Order is completed, inventory items are used. Big or small, expensive or not, it’s important to manage the parts that are being used on your Work Orders.
Determining the Value of Your Inventory On Hand
At any given time it’s important to know the value of inventory on hand at any given location. Your inventory locations might consist of one or more parts warehouses, service vehicles, inventory storerooms, or a combination the three.
When parts are used on a work order, it’s important to track where that part came from. If we use a widget on a Work Order – did it come from Jon’s truck, Mike’s truck, did it come from the Warehouse, or somewhere else? How detailed you want to be is up to you, but however you decide to manage your inventory, make sure you can pull the reports you’re going to need at the end of your fiscal year.
To property manage the value of your inventory you’ll need to decide which accounting method you’re going to use (if you don’t already have one in place). You’ll get different results for each accounting method, so make sure you use the one that will give you the result you’re looking for! (As a side note, we’ve found that almost all government and utility companies use the FIFO method).
As illustrated in the following examples, we can see that using the same dollar amounts and the same parts, the value of your inventory on hand will differ with each accounting method:
- FIFO – Inventory on hand will be valued at $10
- LIFO – Inventory on hand will be valued at $5
- Weighted Average – Inventory on hand will be valued at $7.50
Here are how the values are determined for each method:
1. FIFO (First In First Out)
When using a part on a Work Order the oldest price you paid for that particular part will be used against the Work Order.
For example, lets say you have 2 widgets in your warehouse: you paid $5 for one widget on January 1, and $10 for the second widget on January 2. You now have a total value in your warehouse of $15 ($5 + $10). Now, after using one of these widgets on a Work Order, the oldest price paid gets used first, so the total value in your warehouse is now $10 using the FIFO method ($15 – your total warehouse valuation, minus $5 – the oldest price you paid for the widget).
2. LIFO (Last In First Out)
When using a part on a Work Order the most recent price you paid for that particular part will be used against the Work Order.
Again, lets say you have 2 widgets in your warehouse: you paid $5 for one widget on January 1, and $10 for the second widget on January 2. You now have a total value in your warehouse of $15 ($5 + $10). Now, after using one of these widgets on a Work Order, the newest price paid gets used first, so the total value in your warehouse is now $5 using the LIFO method ($15 – your total warehouse valuation, minus $10 – the most recent price you paid for the widget).
3. Weighted Average
This method uses the weighted average of all prices paid for a particular part to determine the value that will be used against the Work Order.
Again, you have 2 widgets in your warehouse: you paid $5 for one widget on January 1, and $10 for the second widget on January 2. You now have a total value in your warehouse of $15 ($5 + $10). Now, after using one of these widgets on a Work Order, the weighted average of these parts is calculated and used against the Work Order: $15 (total price paid) divided by 2 (number of units) yields a $7.50 average meaning the total value in your warehouse is now $7.50 using the LIFO method ($15 – your total warehouse valuation, minus $7.50 – the average price paid for the widget).
Did we forget something? Anything else to add? Leave us know in the comments!
