Receiving free parts from the vendor

continued from Hot tips
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The replacement cost field is used to calculate sales prices in both an average and replacement cost environment. Replacement cost is only updated from price files or manually as needed. (Sales Price = Replacement Cost + X %)

Average cost values will generally be slightly lower than replacement cost values.

Average Cost Solution
Physical Inventory:

1. Receive a quantity of 10 parts into the physical at $.01 each. 
2. Average cost will immediately recalculate and drive average cost lower. 
3. As the parts are sold, gross profit will be unusually high until those bargain purchase parts are cycled out of the system. 
4. Each subsequent purchase will raise the average cost which will eventually approach $20, unless additional bargain purchases are acquired.

General Ledger Inventory Accounts: 

1. Do nothing. 
2. The $200 profit on the acquisition of the free parts will be recognized over time, as those free parts are sold.

Replacement Cost Solution
Physical Inventory:

1. Receive the quantity of 10 parts into the physical at $20.00 each. 
2. As the parts are sold, normal mark-ups and gross profit will apply.

General Ledger Inventory Accounts: 

1. Debit the inventory account and credit a gain on inventory account for $200. A $200 gain is recorded based on an acquisition price of $0.00.
2. As the free parts are sold, inventory will be relieved based on a $20 cost; normal mark-ups and gross margins will be recorded at point of sale.

Replacement cost does not provide the same flexibility as average cost. Since both selling price and cost are determined from the replacement cost field in the part record, which is a fixed number unless updated, it is not efficient for a parts manager to try editing replacement cost up and down to try to accommodate fluid bargain purchases.

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