Item Costs and Valuation Methods: Average Method

The main benefit of the average-cost method is its simplicity, particularly for companies that deal with a large quantity of a stock item. Instead of keeping track of each item unit's individual cost, the average-cost method calculates the average cost of this item. Businesses that purchase and sell raw materials often use the average-cost method because these materials can slightly fluctuate in price over time. Thus, averaging the costs may help with long-term planning and budget-making.

You assign the average-cost valuation method to a stock item by specifying Average in the Valuation Method box on the General tab of the Stock Items (IN202500) form. If the Average valuation method is assigned to a stock item, its unit cost will be calculated as the average weighted cost of all items at the warehouse—that is, the total costs of all quantities of the item at the warehouse divided by the total quantity of this item at this warehouse.

Reviewing of the Average Cost in Multiple Warehouses

If the Multiple Warehouses feature is enabled on the Enable/Disable Features (CS100000) form, and a few warehouses have been created in the system, the average unit cost of an item can differ at different warehouses. You can review a stock item's average cost on the following forms:

In the Estimated Unit Cost column on the Inventory Summary (IN401000) form, the average unit cost in a particular warehouse.
In the Average Cost box on the Price/Cost tab of the Stock Items (IN202500) form, the average unit cost across all the warehouses. The system uses this unit cost in an adjustment created to add to inventory a stock item that was found during a physical inventory count at a warehouse if this stock item does not yet have any average cost at this warehouse.
In the Average Cost box on the Price/Cost tab of the Item Warehouse Details (IN204500) form, the average unit cost in the selected warehouse is specified.

Tracking of Costs for Items with the Average Method

When a stock item is received in a warehouse, its quantity and unit cost are recorded in a cost layer, which is identified by the warehouse. The system updates the average cost of the stock item in the cost layer every time any of the following documents is released:

Inventory receipt
Inventory issue
Adjustment
Transfer
Kit assembly or kit disassembly

For details, see Item Costs and Valuation Methods: Documents That Record Costs in Layers.

Example of Cost Calculation for the Average Method

Suppose that a stock item was purchased as follows:

Purchase 1: 100 items at $2.00 each
Purchase 2: 100 items at $2.10 each
Purchase 3: 100 items at $1.90 each
Purchase 4: 100 items at $2.20 each

The total stock cost is $820, and the average cost is $2.05. If you sell 250 items—that is, you issue the item from the warehouse—the unit cost is $2.05, and the extended cost recorded to the COGS account is $512.5 = $2.05 * 250.