This article explains what average cost method is and shows an example of how it is calculated.
Acctivate supports a variety of methods for calculating Inventory Valuation and Cost of Goods Sold. The most popular costing method is Average Cost.
Acctivate is a perpetual inventory system using a continuous calculation of average cost. The cost for each transaction is calculated using a "running total" from all transactions prior to and including the specific transaction date. Therefore, multiple transactions in a given accounting period may be calculated at different average unit costs.
This approach is far superior to the simple Weighted Average Cost or Moving-Average Cost methods, in which all transactions for a given period are calculated at the same cost per unit.
The Transaction Date is very important when determining the average cost. There is even a formula for processing transactions on the same date.
The Unit Cost for transactions in an open accounting period may be adjusted when a back-dated transaction is entered. For example, a Customer Sales Invoice may be created before the corresponding Inventory Receipt is posted. Acctivate will use the current Average Cost when the invoice is first created. The unit cost will be updated when the Inventory Receipt is posted. We recommend that the Transaction Date for the Inventory Receipt be back-dated to reflect the physical receipt of goods to provide the most accurate inventory valuation and cost of goods sold.
Here's a set of example transactions that illustrates how Average Cost is calculated.
*Note: Acctivate supports Negative Inventory.
We realize that negative inventory is common in companies just starting with Acctivate. We hope that you will use the Inventory Management Business Alerts to better manage you inventory.
The Average Cost from the last transaction will be used when the quantity on hand falls below zero (i.e., Negative Inventory). The unit cost will be updated when the inventory receipt is posted to correct the negative inventory. Negative inventory should be resolved before the accounting period is closed, otherwise inventory cost adjustments will be posted on the first transaction date after the closing date.