About the Average Costing Method
Average is a cost method which uses a weighted average of the costs
of all items and maintains one actual, average unit cost for an item at all times. Unlike
the other Actual cost flow methods, which store cost information in a separate file, the
Average cost for an item is maintained on the Item
Costs form, in the Unit Cost
Detail fields. The unit cost also appears on the Items form.
The system maintains the cost of inventory as follows:
- When you receive a quantity via a purchase order, job completion, or miscellaneous receipt, the system computes the new average unit cost. This updated average unit cost is then posted to the Unit Cost field on the Items form.
- When you receive a quantity via a customer order return, stock adjustment, cycle count posting, or job material withdrawal, that quantity does not affect the Average unit cost.
- When you issue a quantity to a job or ship a quantity to a customer, the system reduces the associated inventory account by the Unit Cost * Qty Issued or Shipped.
The system calculates the new Average unit cost for each cost details component as follows:
(OQOH * OAUC) + (QR * RC) / OQOH + QR = NAUC
where:
NAUC = new average unit cost
OQOH = old quantity on-hand
OAUC = old average unit cost
QR = quantity received
RC = receipt cost