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ACM Material Costing - FIFO

One of the first basic steps to IFRS compliance is – the FIFO material costing. The FIFO costing is regarded by many experts as the best costing method, because it translates the supply values to the company costs without any variation.

The M2M ACM Material Costing makes adoption of FIFO quick and easy. And more – it brings established business practice to you.


About FIFO

First In First Out – FIFO – is a commonly used algorithm in many everyday processes. Everybody understands it, because it’s plain and simple.

Example Data Sheet

The real life transactions are usually not recorded in such 'organized' order. The FIFO software product has to be able to process almost all combinations of transactions - and not demanding that user has to 'pre-organize' them.


Let's list some examples of transactions which may take place in the real life in manufacturing company:
  • A company started to use an ERP system - QAD Applications. Initially inventory was entered using unplanned receipt transactions (RCT-UNP).
  • Production started and some work order issues (ISS-WO) from initial inventory was recorded.
  • The company started purchasing materials (using RCT-PO). Because not all purchase quantities were the same, the purchase prices varied a little.
  • During the inspection of materials and internal logistics some inventory transfers (ISS-TR and RCT-TR) took place.
  • More work order issues (ISS-WO) was recorded and since the initial inventory was used up, the source is now the purchased materials.
  • A few mistakes were made when recording issues, so they corrected them using work order issue transactions (ISS-WO).
  • Because of some quality problems, some parts were returned to the supplier (using ISS-PRV). Supplier refunded 100% of the value.
  • When recording a return to supplier (ISS-PRV), one mistake was made (10 peaces entered instead of 1) and a correction had to be made (using ISS-PRV).
  • After fulfilling the order, the company stopped the production, and the remaining material on the shop floor was returned to stock. This was recorded with one transaction (using RCT-RS), because the exact work orders from which the returns were made were unknown.
  • The remaining material was partially:
    • Used as safety stock for repairs; they made change of inventory location to disallow picking (using ISS-CHL & RCT-CHL transactions).
    • Returned to the supplier (using ISS-PRV). In this case the supplier refunded only 80% of the purchase price.
    • Sold (using ISS-SO), with 2% profit.
  • At the end of the year the company made an inventory count and found 1 piece of this material which was not recorded in a system. They recorded this using TAG-CNT(+Quantity).
  • Next year they found out that last years inventory count was wrong, and they had to correct this using TAG-CNT(-Quantity).
  • After 7 years, when they didn't need to keep safety stock any more, and they couldn't sell it, they had to make 'write off as for obsolete material' (using ISS-UNP) and manually entered the cost account for this business event. They also had to pay for the disposal of this material to some service company.


Real Life FIFO Issues

In the example above we can find some issues which the Material Costing Module has to address properly:
  • Transactions has to be properly valuated and accounted.
  • Corrections has to be properly linked to the original transactions, valuated and accounted.
  • Each transaction has to be processed according to the period processing policy, which can be:
    • Cumulative - also named Open Periods Method.
    • Periodic - also named Closed Periods Method.
  • Proper valuation of invoiced material receipts and material dependent costs (transportation, customs).
  • Proper valuation of un-invoiced receipts - using accruals.
  • Proper accounting of gains and losses - variations does not exist in FIFO.
  • Corrections of the past periods in the current period.
  • Proper handling of events which are not explained by accounting standards, yet they are necessary in real life - like mass material returns from the shop floor.
  • Proper double-entry accounting.
  • Output must be presented in a way that users (and auditors) can easily understand program decisions.
  • The FIFO rules of processing must be well documented.
  • The possibility of self-learning has to exist - to ease the conversion to FIFO, and cut training costs.


FIFO Setup

FIFO Setup Process

The purpose of the FIFO setup is to make possible to customize the system behavior without programming - for any country environment, and any company specific needs.

The 'FIFO Setup' is a set of rules stored in the setup tables. The M2M ACM programs will process the transactions with respect to these rules.



The FIFO Setup provides several benefits:
  • The same set of programs can be used to satisfy different country and company environments.
  • The method of processing is documented and transparent to the user of the system.
  • The 'FIFO Processing Rules Book' can be generated as a report and included in the 'Company Business Rules Document' in order to present it to the auditors.
  • New methods of transaction processing may easily be added or changed in the future.
  • Default Country/Company Setups can be developed and distributed which enables global usage of the product.
  • A set of predefined setups is available as a part of installation - to make the beginning and the later usage of the system as easy as possible.


Setup Utilities

After accepting the specific setup you have to:
  • Save it.
  • Protect it against uncontrolled changes.
  • Load it into another database.
  • Reload it under another name.


A set of utilities is available to do this tasks:
  • Freeze/Unfreeze Setup: Will freeze the specific setup and maintenance programs will not allow to change it.
  • Unload Setup: Will make a copy of the setup on disk.
  • Load Setup: Will take a file from a disk with specific setup and will load it into the database.
  • Rename Setup: Will rename the setup.


Material Costing Rule Book

The company must maintain the documentation which describes the used costing process and methods, to:
  • Be able to present to the auditors the exact rules by which the system does material costing.
  • Teach employees about costing rules.
  • Check the system and the setup changes.
  • Maintain the archive of the setup changes.

The best way to maintain this documentation is to generate it from the system. Any other method is error prone, time consuming, and usually results with outdated documentation - or no documentation at all.


The 'Material Costing Rule Book'is the report which will make this tasks all at once and without any effort.
The book has three chapters:
Entity Setup

The Entity Setup - describing the entity level setup.






Transactions Setup

The Transaction Setup has three sub-chapters describing:

  • The original transactions processing.
  • The accounting of transactions.
  • The correction transactions processing.
Legend Pages







The Legend - describing the meaning of the keys and methods presented in the previous chapters









FIFO Costing Process

FIFO Costing Process

The basic process of FIFO Costing has a few steps:

FIFO Costing execution can be manual or in batch using standard batch programs setup.






FIFO Card Report

The core report is the material card report which shows all FIFO costing information.

Next step is reviewing the messages, followed by the corrective actions if necessary, and comparing the material receipt values with the material receipt invoices in the AP

GL Journal Entry Post


When you decide to (typically once per month), you will post the results to the General Ledger.




Self-Training - Learning By Doing

For most people, the best method of learning, is to play with the system and to observe the outputs of the process - in opposite to learn the theory first and then deduce the behavior of the system.

This chapter presents the life cycle of one material, step by step, from the start of using ERP system, through months and years, to the end of using this material in the company. Every step is presented and explained in detail, so you can follow these steps and learn about costing process by yourself.

The real life example used to present all inputs and outputs of the system, and the system is pre-set with the 'Default FIFO Setup'.

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