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Description
Cyrious Control supports average costing for material parts that have full accounting and inventory tracking enabled. For these parts, the value of the part is accrued in an inventory asset account until it is used and subsequently expensed.
One of the options that Control provides to maintain accurate costs is “Average Costing”. In Average Costing, the value of existing inventory is blended with the cost of new purchases to produce a new (average) cost for that part. (Note: Average Costing may only be used with material that is accrued in inventory. Control does not provide FIFO or LIFO part costing.)
A sample worksheet in Excel is also available for review at this link.
inventory_weighted_average_worksheet.xlsx
How It Works
The basic idea of average costing is to combine the current value of inventory and the new purchase and then divide by the total quantity. Formulaically, this would be:
COST_Average~~\frac{(QTY_{Existing} * COST_{Existing}) + (QTY_{New} * COST_{New})}
{QTY_{Existing} + QTY_{New}}
Note however, that if the existing quantity is negative, this formula is not used (or desirable). Since a negative quantity doesn't make accounting sense, the existing quantity is ignored and the average cost is given as:
COST_Average~~COST_{New}
Examples
Example 1 - Using Average Costing
Your have 175 widgets in inventory at a current part cost of $1.10 each. Bill #1234 is entered for 300 widgets at a total cost of $360 ($1.20 each). Average costing is being used. The new average cost is:
COST_Average~~\frac{(175 * \$1.10) + (300 * \$1.20)}{175 + 300}
COST_Average~~\$1.1632~each
The GL activity for this would be:
| ~ Account | ~ Debit | ~ Credit | ~ Part | ~ Quantity | ~ Bill | ||||||
| Widget inventory Asset | > $ 360.00 | Widget | 300 | 1234 | |||||||
| Accounts Payable | > $ 360.00 | 1234 |
Example 2 - Not Using Average Costing
Your have 175 widgets in inventory at a current part cost of $1.10 each. Bill #1234 is entered for 300 widgets at a total cost of $360 ($1.20 each). Average costing is not being used. The new average cost is unchanged, so:
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COST_Average~~\$1.10~each
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Since the change in inventory value does not equal the amount of the new bill, the overage (or shortage) is immediately expensed into the gl_account_-_inventory_adjustments. The GL activity for this would be:
||~ Account ||~ Debit ||~ Credit ||~ Part ||~ Quantity ||~ Bill ||
| Widget inventory Asset | > $ 330.00 | Widget | 300 | 1234 | |||||||
| inventory Adjustments | > $ 30.00 | 1234 | |||||||||
| Accounts Payable | > $ 360.00 | 1234 |
Example 3 - Average Costing with Negative inventory
Your have -15 widgets in inventory at a current part cost of $1.10 each. Bill #1234 is entered for 300 widgets at a total cost of $360 ($1.20 each). Average costing is being used, but since the existing inventory is negative the new average cost uses the new cost, so:
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COST_Average~~\$1.20~each
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Changing the existing cost will revalue the existing inventory (by $0.10 each times a quantity of negative 15 ), which must be taken into consideration. The overage (or shortage) is immediately expensed into the gl_account_-_inventory_adjustments. The GL activity for this would be:
||~ Account ||~ Debit ||~ Credit ||~ Part ||~ Quantity ||~ Bill ||
| inventory Adjustments | > $ 1.50 | ||||||||||
| Widget inventory Asset | > | > $ 1.50 | Widget | ||||||||
| Widget inventory Asset | > $ 360.00 | Widget | 300 | 1234 | |||||||
| Accounts Payable | > $ 360.00 | 1234 |
Note that after this purchase there will be 285 widgets in inventory at a value of $1.20 each.
See Also