The inventory close process in Microsoft Dynamics AX settles issue transactions to receipt transactions based on the inventory valuation method that is selected in the item's inventory model group.

Before inventory close is run, however, Microsoft Dynamics AX calculates a running average cost price that in most cases is used for posting issue transactions.

Microsoft Dynamics AX estimates this running average cost price for an item by using the following formula:

Estimated price = (physical amount + financial amount) / (physical quantity + financial quantity)

The following table indicates when Microsoft Dynamics AX posts inventory transactions using the running average cost price, and when it uses the cost price defined on the item master record instead.

IF…		Estimated running average cost price	Cost price defined on the item master
Both the numerator and denominator are positive	THEN Microsoft Dynamics AX uses…	x	Blank
The numerator, denominator, or both are negative	THEN Microsoft Dynamics AX uses…	Blank	x
If the denominator is 0 (zero)	THEN Microsoft Dynamics AX uses…	Blank	x

* Numerator = (physical amount + financial amount); Denominator = (physical quantity + financial quantity)

Note
If the Include physical valueoption is not selected for an item, Microsoft Dynamics AX uses 0 (zero) for both physical amount and physical quantity.

The Pricing Amplification Issue

On rare occasions, you may encounter a pricing amplification scenario that yields overly inflated running average cost price estimates. These are possible when Microsoft Dynamics AX prices several issues before it has sufficient receipts to base a price on.

There are, however, steps you can take to avoid the issue, or to mitigate its impact when it does occur, as explained in the following scenario.

Scenario

The following transactions occur with an item for which you have applied the Include physical valueoption:

You receive 100 @USD 100.00 financially.
You issue 200 financially.
You receive 101 @USD 202.00 physically.

When you examine the estimated running average cost price for the item, although you expected a cost price of USD 1.51, you discover an estimated running average of USD 102.00 based on the following formula:

Estimated price = [202 + (-100)] / [101 + (-100)] = 102/1 = 102

This occurs because when 200 items are issued financially in step 2, Microsoft Dynamics AX is forced to price 100 of the items before it has any corresponding receipts, which results in negative inventory. Microsoft Dynamics AX then estimates a unit price of USD 1.00, which we might expect, but when the corresponding 100 receipts come, they are at a unit price of USD 2.00 each.

Note
Even though the issues result in negative inventory, inventory is positive at the time the issue price is computed. That is why the running average cost price is used, rather than the price on the item master.

At this point, Microsoft Dynamics AX has an inventory value offset of USD 100.00. And while that offset was built up over 100 pieces, with a unit offset of USD 1.00 each, we now have only one piece in inventory, and that offset of USD 100.00 is allocated to this single piece, resulting in the overly inflated estimated cost price.

Note
For comparison, note that if steps 2 and 3 are reversed in the example above, 200 items will be issued at a unit price of USD 1.51, and one piece will remain at a unit price of USD 1.51.

Because this pricing amplification scenario can occur when negative inventory is involved, it is difficult to avoid in the following cases:

You must estimate issue prices on the on-hand value and quantity
You must adjust the on-hand value and quantity on issues and receipts
Your business model allows for sending out, or pricing, more pieces than you have
You must accept any receipt value and quantity submitted to you

If your business model allows them, however, the following practices can help you avoid the negative quantities that make the pricing amplification scenario possible:

If you select the Include physical valueoption for an item, then clear the Physical negative inventorycheck box on the Setuptab in the Inventory model groupsform.
If you do notselect the Include physical valueoption for an item, then clear the Financial negative inventoryoption on the Setuptab in the Inventory model groupsform.

Bear in mind also that the maximum offset in your physical inventory value is limited by the number of physical transactions and the difference between physical and financial prices. As long as all physical transactions are eventually updated financially, then the physical value cannot rise to extreme levels.

In addition, the amplification effect decreases significantly when the accumulated offset is spread out over a number of on-hand pieces rather than just one.

The Pricing Amplification Issue

See Also