The average cost is calculated for each inventory decrease for items that use the Average costing method.
Setup for Average Cost
There are two setup options in the Inventory Setup window that are necessary for calculating average cost:
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Average Cost Period: The program calculates the average cost per average cost period. This can be per day, per week, per month, or per accounting period. All inventory decreases that were posted within the average cost period receive the average cost calculated for that period.
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Average Cost Calc. Type: The average cost can either be calculated per item; or per item, variant, and location.
How the Program Calculates Average Cost
When you post a transaction for an item that uses the Average costing method, the program creates an entry in the Avg. Cost Adjmt. Entry Point table. This entry contains the transaction’s item number, variant code, and location code. In addition, the entry contains the valuation date, which is the last date of the average cost period in which the transaction was posted.
The program actually calculates the average cost of the transaction when you run the cost adjustment batch job. If you have set up automatic cost adjustment in the inventory setup, this happens automatically when you post the transaction; otherwise, you must run it manually.
The program uses the entries in the Avg. Cost Adjmt. Entry Point table to identify which items (or items, locations, and variants) to calculate average costs for. For each entry whose cost has not yet been adjusted, the program does the following to determine the average cost:
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Determines the cost of the item at the beginning of the average cost period.
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Adds the sum of the receipt costs that were posted during the average cost period. These include purchases, positive adjustments, outputs, and revaluations.
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Subtracts the sum of the costs of outbound transactions that were fixed applied to receipts in the average cost period. These might include purchase returns and negative outputs.
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Adds any revaluation costs that have been posted on the quantity that remains at the end of this period.
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Divides by the total inventory quantity as of the end of the average cost period.
The program then applies this average cost to the inventory decreases for the item (or item, location, and variant) that occurred in the average cost period. If there are any inventory increases that were fixed applied to inventory decreases in the period, the program forwards this average cost to these entries as well.
Example for Average Cost Period
This example shows the effect of calculating the average cost with different average cost periods. In this example, the average cost calculation type is set to calculate per item.
The first table shows average cost calculations with an average cost period of “Day”. Notice that the average cost is calculated for 01-01-07 and applied to entry 3. The average cost for entry 4 remains the same as the previous day. Then, the average cost for entry 6 is re-calculated for the new day with a new value.
Valuation Date | Quantity | Cost Amount (Actual) | Entry No. |
01-01-07 | 1 | 20 | 1 |
01-01-07 | 1 | 40 | 2 |
01-01-07 | -1 | -30 | 3 |
02-01-07 | -1 | -30 | 4 |
02-02-07 | 1 | 100 | 5 |
02-03-07 | -1 | -100 | 6 |
The second table shows the same transactions with an average cost period of “Month,” so that the average cost of entry 3 is calculated in the average cost period for January, and the average cost for entries 4 and 6 is calculated in the average cost period for February.
At the beginning of the February period, the cost of the one piece in inventory is 30. To get the average cost for February, the program adds the average cost of the piece received into inventory (100) to the average cost at the beginning of the period (30) and divides the result (130) by the total quantity in inventory (2), resulting in the average cost of the item in the February period (65). The program then assigns that average cost to the inventory decreases in the period (entries 4 and 6).
Valuation Date | Quantity | Cost Amount (Actual) | Entry No. |
01-01-07 | 1 | 20 | 1 |
01-01-07 | 1 | 40 | 2 |
01-01-07 | -1 | -30 | 3 |
02-01-07 | -1 | -65 | 4 |
02-02-07 | 1 | 100 | 5 |
02-03-07 | -1 | -65 | 6 |
Example for Average Cost Calc. Type
This example shows the effect of calculating the average cost with different settings in the average cost calculation type.
This first table shows the result with an average cost calculation type of “item”. The average cost period in this example is set to “Day”.
Valuation Date | Location | Quantity | Cost Amount (Actual) | Entry No. |
01-01-07 | BLUE | 1 | 20 | 1 |
01-01-07 | BLUE | 1 | 40 | 2 |
01-01-07 | RED | 1 | 100 | 3 |
01-01-07 | RED | 1 | 200 | 4 |
02-01-07 | BLUE | -1 | -90 | 5 |
02-01-07 | BLUE | -1 | -90 | 6 |
02-01-07 | RED | -1 | -90 | 7 |
02-01-07 | RED | -1 | -90 | 8 |
The following table shows the effect of calculating the average cost per item, location, and variant:
Valuation Date | Location | Quantity | Cost Amount (Actual) | Entry No. |
01-01-07 | BLUE | 1 | 20 | 1 |
01-01-07 | BLUE | 1 | 40 | 2 |
01-01-07 | RED | 1 | 100 | 3 |
01-01-07 | RED | 1 | 200 | 4 |
02-01-07 | BLUE | -1 | -30 | 5 |
02-01-07 | BLUE | -1 | -30 | 6 |
02-01-07 | RED | -1 | -150 | 7 |
02-01-07 | RED | -1 | -150 | 8 |