Costing each vehicle sold: specific identification
Why a dealer costs each vehicle at its own cost while parts use FIFO or average cost, and how to fit that to a system with one cost price per item.
By Achekam · · 4 min read · For Automotive businesses in South Africa, Nigeria, Kenya
Two silver hatchbacks of the same model and year sit side by side on the lot. One was bought at auction, needed new tyres and a respray, and cost the dealership considerably more than the other, which came in as a clean trade-in. When the first one sells, what was its cost of sale?
If the books use an average of the two, both sales report a margin that neither actually earned. The dealer principal cannot tell which purchase was a good one, which salesperson negotiated well, or whether auction stock is worth buying at all. For vehicles, there is a better answer, and the accounting standard on inventories points to it.
Unique items, unique costs
Under IAS 2, the cost of inventory items that are not ordinarily interchangeable is assigned by specific identification of their individual costs. The IFRS Foundation's page on IAS 2 Inventories sets out the standard's requirements on cost formulas and when each applies.
Investopedia describes the specific identification method as using the actual cost of each unit sold, and notes that it is typically used for unique items such as cars, real estate and precious jewels. A used vehicle is about as far from interchangeable as stock gets: each has its own purchase price, its own reconditioning bill, its own mileage and condition. Even new vehicles of the same model often differ in specification, options and the price paid.
So the cost of a vehicle sold should be that vehicle's own cost: what was paid for it, plus the costs of getting it ready for sale, such as reconditioning, roadworthy or inspection work, and transport to the lot.
Average cost and FIFO for parts
The parts department is different. A box of oil filters for one model contains identical items, bought in batches at slightly different prices over time. Tracking the cost of each individual filter would be pointless.
IAS 2 deals with this case too. The cost of items that are ordinarily interchangeable, generally large quantities of individually insignificant items, is assigned using the first-in, first-out or the weighted average cost formula. Investopedia explains that the average cost method values goods sold at the average price of all goods in stock, smoothing out the effect of unusually high or low purchase costs.
A dealership therefore typically runs two costing approaches side by side: specific identification for vehicles, and FIFO or weighted average for parts.
How Achekam costs a sale
Achekam's Item Master, in the Accounting menu, lists and creates products on the server with an SKU, name, category, selling price, cost price, opening quantity and VAT treatment. It needs the Point of Sale, Warehousing or Wholesale add-on.
When a sale goes through the till and reaches the server, Achekam posts a balanced journal in the same step: the payment to its own account, revenue, output VAT, and cost of sales against inventory at the product's cost price. Cost of sales uses the single cost price typed on the product. Achekam does not calculate FIFO or weighted-average cost.
That limitation is less awkward for vehicles than it sounds.
Setting up each vehicle as its own item
Specific identification fits a system with one cost price per item as long as each vehicle is its own item. Create a separate product for every vehicle in stock:
- SKU: the dealership's stock number, or the VIN.
- Name: make, model, year and colour, so it can be found quickly.
- Category: new, used, demo, or whatever grouping the dealership reports on.
- Cost price: that vehicle's own cost, including reconditioning and other costs of getting it ready for sale.
- Selling price: the advertised price.
- Opening quantity: one.
When the vehicle sells at the till, cost of sales posts at exactly that vehicle's cost. Because there is only one unit, there is no averaging to worry about.
Parts with one cost price
For parts, a single cost price per product is a simplification. Where purchase prices are stable, it may be close enough. Where they move, for example on imported parts affected by exchange rates, the cost price on the product and the actual cost of the parts sold will drift apart.
Keep the cost price on each part as close to current cost as your process allows, and ask your accountant to compare inventory and cost of sales with a FIFO or weighted-average calculation at month end or at least at year end. Any adjustment is posted as a manual journal. Achekam refuses a journal that does not balance or that is dated in a closed month, and corrects a posted journal only by a reversal.
When costs change after the vehicle is loaded
The common snag with vehicles is timing. A trade-in is loaded into stock on the day it arrives, at its purchase price. A week later it gets new tyres and a service, and its true cost goes up. If it sells before anyone updates the product, cost of sales posts at the old figure.
Two habits keep this under control:
- Load late or update early. Either load the vehicle once its reconditioning is complete, or make sure the cost price is brought up to date before it is offered for sale.
- Reconcile monthly. Compare each vehicle sold with its costing sheet: purchase invoice, reconditioning invoices, and other costs. Where the cost of sales posted differs from the costing sheet, post a journal for the difference.
The monthly reconciliation also catches a reconditioning invoice that arrives after the car has gone, which is common with outside body shops.
For keeping track of each vehicle while it waits for a buyer, see used vehicles in stock; for the parts side, read costing imported parts.
A dealership that knows what each vehicle really cost knows what each deal really made. That is the point of costing them one at a time.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
