The model group setup for an item determines whether physically updated transactions are factored into the calculation of the item's running average cost price.
Specifically, if the box is selected on the model tab of the form, then both physically updated transactions and financially updated transactions will be used to calculate the running average cost price.
If the box is cleared, only financially updated transactions will be used in the calculation of the running average cost price.
The parameter leads to some slightly different results depending on the inventory model you choose:
If you select the box when using the FIFO, LIFO, or LIFO Date inventory models, then inventory close will also make adjustments to physically updated transactions.
If you do not select the box with these inventory models, then inventory close will make settlements only to financially updated transactions.
When you use the weighted average or weighted average date inventory models, inventory close will settle only financially updated transactions whether or not you select the box.
You have selected the box and receive the following purchase orders:
Purchase order for a quantity of 2; cost price is USD 10.00; packing slip updated
Purchase order for a quantity of 3; cost price is USD 12.00; invoiced updated
In this case, the running average cost price will be USD 11.20 because both physically and financially updated transactions are used to calculate the cost price.
You have not selected the box and the cost price on the item setup is USD 10.00. You receive the following purchase order:
Purchase order for a quantity of 20; cost price is USD 12.00; packing slip updated
When a sales order is posted, the system will post the cost amount at USD 10.00 because the running average cost price will not include physically posted transactions.
For comparison, if this item had been set up with selected, the sales order would have been posted with a cost amount of USD 12.00.