Author Topic: Understanding the Average Cost  (Read 1988 times)

Offline Lee

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Understanding the Average Cost
« on: February 02, 2011, 09:15:31 AM »
From another thread:

"The number used for the Total Assets is the Avg Cost field times the Qty field on all the products.  Check those fields."

Having learned this I checked one product that I sell... propane.  My most recent purchase was of 640ga at $2.88/ga. while the previous delivery was of 475ga at $2.74/ga.  Present inventory was reported as 858ga with a cost of $2.88/ga and an average cost of $2.49/ga.

Adhering to a "first in, first out" stock rotation policy (as is necessary with other, perishable items) my present inventory, 858ga, is 640ga at a cost of $2.88/ga and 218ga at $2.74/ga for a true "average cost" of $2.84/ga.  As 858ga is $2,436.72 at $2.84/ga and $2,136.42 at $2.49/ga it appears that my present inventory is being undervalued by $300.30.

Furthermore, whenever depleted stock is replaced it is immediately devalued unless the cost has not risen, resulting in an ever-increasing de-valuation unless the "average cost" is consistently reset.

I would prefer that the value of my stock was related to the most cost and not the average of what I have paid over the last few years.

"The Avg Cost can be set the Cost using the Tools / Set Avg Cost to Cost function."

Apparently, I shall be doing this often.
Hyampom General Store
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Offline ronaldrwl

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Re: Understanding the Average Cost
« Reply #1 on: February 14, 2011, 09:12:34 AM »
The way it works:

Bought 5 at 2.00
Your Avg Cost is 2.00
Sell 3
Bought 5 more at 2.10
Your Avg Cost = (2*2.00 + 5*2.10)/7 = 2.07

Offline Lee

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Re: Understanding the Average Cost
« Reply #2 on: February 14, 2011, 07:37:41 PM »
A moving average based on the most recent purchases and existing stock, as oppose to an average of total paid divided by the total number ever bought.  That works.

Thank you,
Lee
Hyampom General Store
ezPower POS Network Ver13.701 - General Retail - Win7 - Bematech MP-4000TH Printer