Initial Cost is fundamental in determining many important aspects of your business health, such as Cost tracking, Profit Margin reporting, and getting the Total Stock Value.
In this article, we will be covering the Initial Cost and why it is important for your business through the following topics:
- What is Initial Cost?
- Why should I care about the Initial Cost?
- How is Initial Cost determined?
- How can I set up Initial Cost in QuickBooks Commerce?
- Frequently Asked Questions
What is Initial Cost?
Initial Cost is the average cost of acquiring your existing stock on hand, at the point of importing your products to QuickBooks Commerce. Most products imported/created in QuickBooks Commerce had a history of being acquired, either by purchasing the item from your supplier or manufacturing them. The cost of acquiring these products into your inventory is referred to as the Initial Cost.
Initial Cost is an integral part of your business. The importance of Initial Cost will be explored more later in this article under “Why should I care about Initial Cost”?
Initial Cost cannot be changed after any transaction that creates stock movement has been performed on a variant. These transactions are:
- Fulfilling stock to your customer via Sales Order
- Fulfilling returns from your customer via a Sales Order
- Receiving stock from your supplier via a Purchase order
- Completing a Production Order for a Manufactured Product
- Creating a manual Stock Adjustment
This is because Moving Average Cost (MAC) is continuously recalculated with each stock movement mentioned above. Once a variant’s stock has moved, and its MAC has changed, you can no longer change its initial cost. However, it’s still possible to fix! See "What if my Initial Cost is incorrect?" for more information.
Why should I care about the Initial Cost?
If you have many products, setting up Initial Cost might seem like an unnecessary additional task. However, having the correct Initial Cost is extremely important for your business. It gives you a better picture of your business by providing accurate cost tracking and better profit accounting.
Let’s take a look at why setting up the correct Initial Cost is a well-worth investment of your time:
1. Maintain the correct MAC (Moving Average Cost)
Moving Average Cost is a fundamental concept for cost tracking in QuickBooks Commerce - it determines the true cost of a product over its lifetime. In QuickBooks Commerce, the MAC of a variant started with its Initial Cost and is continuously recalculated with each stock movement on the variant. Setting up the correct Initial Cost will give you the most accurate MAC from the start of your QuickBooks Commerce time. You can learn more about MAC here.
2. Correct Profit Margin Reporting
Cost tracking is essential in calculating the correct profit margin of an item. Profit Margin tells you the profitability of your items and can provide important data for your business. Knowing the correct Profit Margin of each item lets you know how much each item actually contributes to your business and prioritizes which items you should be focusing on.
3. Accurate Calculations of Business Tax
Cost of Goods Sold (COGS) is an important accounting item required for calculating your business tax. Like MAC, to determine COGS, we need to know the Initial Cost of an item. It would be best if you had accurate COGS for your accounting to calculate the correct tax. Therefore, getting your COGS calculation correct can potentially reduce your business tax, so it’s definitely something you should care about.
How is the Initial Cost determined?
At first glance, the Initial Cost may sound like a Buy Price. However Initial Cost might actually be different than Buy Price due to a few reasons:
- Discounts: Getting a discount when acquiring a certain product will result in a lower value of the cost price of your inventory due to bulk discounts that your supplier may have provided. Let’s say an item costs $5, but purchasing it in bulk may result in the price being reduced to $4, even though the item still costs $5 in your supplier's price list.
- Landed Costs: Having a landed cost in the process of acquiring a product will result in a higher value of the cost price of your inventory due to shipping and/or handling fees related to acquiring stock. If an item costs $5 to purchase, it has not included the cost of getting it to your warehouse (for example, $1 shipping), which will raise the cost to $6 per item.
- Multiple Supplier Cost: If you are buying your products from different suppliers and giving you different prices, this might result in a lower or higher value of cost than the current buy price.
How can I set up Initial Cost in QuickBooks Commerce?
Initial Cost is set per variant in QuickBooks Commerce. This can be done in a few ways:
- On manual product creation
- On product import
- When fulfilling a sales order/receiving a return
- When receiving a purchase order
- When creating a stock adjustment
- When adding a new sales channel
On Manual Product Creation
If you are creating your product manually in QuickBooks Commerce (Inventory > Create New), Initial Cost is already required. Input your cost price for the product you are creating in the respective field.
If you have specified multiple variants or pack sizes on the product, you can also specify the Initial Cost per variant on the next page.
On Product Import
If you have imported your products into QuickBooks Commerce from a sales channel (Shopify, WooCommerce, etc.) or a CSV, you can then import Initial Cost using our “Import Initial Cost” tool (Inventory > Products > Bulk Manage > Import Initial Costs). Click here to learn more about setting up Initial Costs on imported products.
Please keep in mind you must promptly set up your Initial Cost as soon as your products have been imported to QuickBooks Commerce to ensure accurate calculations. Initial Cost cannot be changed after any transaction that creates stock movement has been performed on a variant.
Fulfilling a Sales Order/Receiving a Return
When fulfilling a Sales Order or receiving a Sales Return, if the Initial Costs aren’t set on the products within the order, you will be prompted with a cautionary message that the Initial Costs aren’t set and the implications with accounting integrations (if you have any). Once you proceed to fulfill the Sales order or Receive the return, you’ll be prompted with a pop-up warning with two options: Ignore and Ship Anyway OR Set Initial Costs Now.
Receiving a Purchase Order
When receiving a Purchase Order, if the Initial Costs aren’t set on the products within the order, you’ll be prompted with a pop-up warning with the implications. Here, you’ll have the option to either use the Cost per Item values within the Purchase Order as the initial costs (landed costs will not be taken into consideration) OR set up the initial costs manually.
Create a Stock Adjustment
When creating a Stock Adjustment, if the Initial Costs aren’t set on the products within the Stock Adjustment, you’ll be prompted with a pop-up warning with the implications. Here, you’ll have the option to either use the Cost per Item values within the Stock Adjustment as the Initial Costs OR set up the Initial Costs manually.
Adding a new Sales Channel
When adding a new Sales Channel, the Initial Costs are not added for all products being imported from the Sales Channel automatically. Once you’ve finished with the Product Import process from the Sales Channel, you’ll be prompted with a pop-up message indicating the products that do not have Initial Costs set - here; you can set up the Initial Cost for each of your imported products.
Frequently Asked Questions
What should I do if my Initial Cost is incorrect?
If your Initial Cost was not set up correctly and you have already done transactions that change your MAC on the variant, please contact our support. We'll get in touch with you with the next steps on how to fix your MAC.
What if I don’t know what my Initial Cost is?
If you are not sure of the Initial Cost of your variants, or if you get free shipping (and thus no landed cost), it's safe to say that you can have the Initial Cost value set to be the same as the product's Buy price.
Regardless, the Initial Cost should not be left as 0 unless it was obtained for free. Otherwise, setting it at 0 might render your MAC value inaccurate, consequently providing incorrect cost tracking.