Inventory Tracking

Overview

Mezan uses the weighted average method to keep track of inventory values and quantities. This is one of the common methods used in accounting software to keep track of inventory, and is the most reliable method for most business operations to keep things simple and accurate.

Inventory Tracking Methods

Inventory tracking in software solutions can be done in different ways.

There are three primary methods most systems consider when building an inventory tracking system:

  1. Weighted Average: Calculates the average cost of inventory based on the total cost divided by the total quantity
  2. FIFO (First-In-First-Out): Implements a batching system, and assumes oldest inventory items are sold first
  3. LIFO (Last-In-First-Out): Implements a batching system, and assumes newest inventory items are sold first

Mezan implements the weighted average method, and does not support FIFO or LIFO. This is by design, and is the most reliable method for most business operations to keep things simple and accurate.

Weighted Average Method

Mezan implements the weighted average method for inventory tracking. This methods formula is:

Formula: (Total Inventory Value + New Purchase Value) / (Total Quantity + New Purchase Quantity)

Key benefits of the weighted average method:

  • Simplifies accounting by using a single cost for all identical items
  • Prevents cost fluctuations from significantly impacting financial statements
  • Works well for businesses where items do not rely on a batching system
  • Provides a balanced approach that reflects both historical and current costs

How Does Mezan Update Inventory Values?

Mezan has many transactions from different modules that can affect inventory values and quantities.

Core transactions that affect inventory values and quantities:

  • Purchasing Invoices: Increase inventory quantities for purchased items
  • Debit Notes: Reduce inventory quantities for returned items
  • Sales Invoices: Decrease inventory quantities for sold items
  • Credit Notes: Increase inventory quantities for returned items
  • Inventory Stocktakes: Update inventory quantities and values based on the physical counts
  • Inventory Transfers: Move inventory quantities and values between different locations
  • Inventory Consumptions: Decrease inventory quantities and log expenses for used items

Time and Order of Inventory Changes

All inventory changes in Mezan are calculated and updated during the confirm step of the transaction.

Mezan modifies the inventory values of a product when a transaction is confirmed. Which means if you create transactions on past dates, Mezan still modifies the current inventory levels based on the current inventory.

Mezan operates with the idea of "eventual consistency", even if you create your transactions in a mixed order, it will eventually even out.

Negative Inventory

To keep things flexible, Mezan allows you to have negative inventory levels. Which means you can sell more than you have in stock. This is useful for businesses that need to manage their inventory levels more flexibly, and may log purchasing operations later or in a mixed order.

When an product's inventory value or quantity is negative, the cost of goods sold will be calculated using the default purchase price of the product.

If you have negative inventory values because you purchased for cheaper prices later, you can always modify the inventory levels using inventory stocktakes, to reverse the negative inventory values and get your current inventory values and quantities back into a consistent state.

Inventory Reporting

There are two main reports for tracking inventory:

  1. Current Inventory: Shows the current inventory quantities and values of all products in all stores. This is the result of the weighted average method in the order your transactions were created.
  2. Inventory Ledger: The ledger can be used to see the actual transactions that have occurred for a specific store, including the date, quantity, and value of each transaction. In the order the transactions are dated on. The running total of the quantity and value in this report is per store and product, and should match the current inventory quantity and value of the product at the end of the report for each product.