Product Costing Methods In Odoo

Product costing is the accounting process of deciding all business expense relating the creation of an organization product. These expenses can include crude material purchases, labor salary, production transportation expenses, and retail stocking charges. An organization uses these general expenses to design various business techniques, including setting product costs and creating promotional campaigns. An organization likewise uses product costing to discover approaches to streamline production expenses to increase profits. Product costing plays an important role in the manufacturing environment. The value of estimated inventory will affect the cost of goods sold, net profit, gross income, working capital, current asset etc. The following paragraphs explaining the functional behavior of Product Costing methods In Odoo.

Three product costing methods odoo:

1. Standard price
2. Average price
3. Real price

The standard price costing method will be in default if we didn’t specify the costing method in product category form. Now, let's check the three cost prices and how it will affect the Odoo product’s price calculation.

1. Standard price

• Standard price is simple
• The purchase order price has no effect on standard pricing. That is it just simply uses the cost field (Purchase receipts and deliveries don’t affect cost ).
• In the case of standard price product costing method, the cost price usually needs to be changed manually. In most of the case's the product’s price changed periodically in a year or after a specific period.

1. To create a new product category go to Inventory >>> Configuration >>> Product categories >>> Create category for standard price.

2. Create a product with a created category and set the cost price and sales price manually.

3. Then go to purchase and make purchase orders.

Now we purchased a product with product price greater than cost price and click on shipment to receive product and further validate it.

Then go to products >>> standard product, check the cost price of the product. It will be still 10 and no change.

• It’s same if we purchase and update quantity on hand by a price less than the cost price.
• So let’s say the standard costing method is not dynamic and we need to change manually.
• Now lets check is there any difference when making sales order for the product with standard price costing method.
• Go to sales>>>quotation>>>Create quotation. And then confirm sale order, Receive product and then validate it.

Then go to product >>> standard product, you can see that the cost price is not changed.

2. Average price

• Every time the product is purchased and received the cost is recalculated based on the purchase order paid and quantity ordered.
• But when the product leaves the warehouse the cost is not affected.

1. Create a new category for an average price.  To do so go to inventory >> configuration >>> products >>> product category >>> create a product with costing method as average cost.

2. Create a product with product category as average price costing method. Initially, the product cost is set to zero.

3. Consider the example below.

a) Make a purchase order for a quantity of 8 units with a purchase price of $10.

b) Then go to inventory>>>inventory valuation.  You can see the inventory value is 80( quantity*purchase price)

c) To see what happens to cost, go to product>>>select Average. Then we can see that cost is automatically updated as 10.

d) As above, make another purchase order for four quantities at a purchase price of $16. Confirm order, receive product and validate it.

Then go to the product and you can see that the cost of the product is updated to 12.

e) Next, make a sales order for 10 unit quantities.

Then go to inventory >>> inventory valuation, you can see now the inventory value will be 24 ,(i.e(8*10 + 4*16)-(10 * 12) ).

Now, to check what will be the effect on cost, go to product >>> average.

Here the cost is still 12.

f) Make one more purchase order for two units of product with a purchase price of 6.

Now go to inventory >>> inventory valuation, now the inventory value become 36 (24 + 2*6).

Then check what happens to cost price.

The cost now becomes 9, (i.e 36/4).

3. Real price

• Most common and widely used costing method.
• This method updates the cost price of a product according to the last outgoing product in the inventory. So price is also affected by the removal strategies like  FIFO, LIFO etc.

To create a product with a new category, Go to inventory >>> configuration >>> product category >>> create a category for real price costing method.

Then create a product with real price costing method.

Next, consider the example shown below.

a) Make a purchase order for 8 units product quantity for a purchase price of 10 rupees.

Confirm order and receive product by clicking on shipment and then validate it.

Check inventory value in inventory >>> inventory valuation. Now the inventory value is 80.

Then go to product >>> real product. Check cost and you can see it is still 10.

b) Make another purchase order with purchase order price greater than cost price.

Confirm sales order, receive product and then validate it. Go to inventory >>> inventory valuation, now the inventory value will be 144.

Then go to product >>> real product, check the cost of the product and it is still 10.

c) Next, make a sales order for 10 unit of product. To do so go to sales >>>quotation >>> confirm quotation.

Click on delivery and validate it.

Then check inventory value and it will be 32.

To check what happens on cost go to product >>> real product, check cost, it will be updated to 16,(i.e(16*2)/2).

d) Then make one more purchase order for two products with a purchase price of 6 rupees.

Go to inventory to see inventory value. Now it will be 44.

Then go to product >>> real product, check cost price, it is still 16 and there is no change.

So, we can summarize that the cost price of a product doesn’t change until a product is removed from the inventory by any of the removal strategies.

Hope you understood the Product Costing Methods In Odoo..