Examples: Average Costing
Average Costing Calculation Example (Purchased Items):
Item A has a quantity of 120 on-hand with an Average unit cost of:
(Since this is a purchased item, only the material portion of the unit cost details is represented.)
| Type | Cost |
|---|---|
| Material Cost | $2.10 |
| Labor Cost | |
| Fixed Overhead Cost | |
| Variable Overhead Cost | |
| Outside Cost | |
| Average Unit Cost | $2.10 |
If 50 of Item A are received into stock via the Purchase Order Receiving function at a cost of:
(Since this is a purchased item, only the material portion of the unit cost details is represented.)
| Type | Cost |
|---|---|
| Material Cost | $2.65 |
| Labor Cost | |
| Fixed Overhead Cost | |
| Variable Overhead Cost | |
| Outside Cost | |
| Average Unit Cost | $2.65 |
New average cost will show on the Item Costs form, Unit Cost field as follows:
| Type | Cost |
|---|---|
| Material Cost | $2.25 |
| Labor Cost | |
| Fixed Overhead Cost | |
| Variable Overhead Cost | |
| Outside Cost | |
| Unit Cost | $2.25 |
Average Costing Calculation Example (Manufactured Items):
Item A has a quantity of 120 on-hand with an Average Unit Cost of $2.10 (see below).
| Type | Cost |
|---|---|
| Material Cost | $1.00 |
| Labor Cost | $0.30 |
| Fixed Overhead Cost | $0.80 |
| Variable Overhead Cost | |
| Outside Cost | |
| Unit Cost | $2.10 |
If 50 of Item A are received into stock via the Purchase Order Receiving function at a cost of $2.65:
| Type | Cost |
|---|---|
| Material Cost | $1.65 |
| Labor Cost | $0.60 |
| Fixed Overhead Cost | $0.40 |
| Variable Overhead Cost | |
| Outside Cost | |
| Unit Cost | $2.65 |
The system calculates the new Average unit cost for each cost detail 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
New Average unit costs for each cost detail component are calculated by the system and the sum of these details is the new average unit cost shown on the Item Costs form as well as on the Items form.
These details are material cost, labor cost, fixed overhead cost, variable overhead cost and outside service cost. The Unit Cost field is a summation of these values. The unit cost will display view only at the Items form.
This table displays the calculations and totals for various cost types:
| Type | Calculation | Total |
|---|---|---|
| Material Cost | (120*$1.00)+(50*$1.65)/(120 + 50) | $1.19 |
| Labor Cost | (120*$.30)+(50*$.60)/(120 + 50) | $0.39 |
| Fixed Overhead Cost | (120*$.80)+(50*$.40)/(120 + 50) | $0.68 |
| Variable Overhead Cost | (20*$0.00)+(3*$0.00)/(20 + 3) | $0.00 |
| Outside Service Cost | (20*$0.00)+(3*$0.00)/(20 + 3) | $0.00 |
| New Average Unit Cost | $1.19 + $0.39 + $0.68 + 0.00 + 0.00 | $2.26 |
Inventory Distribution Journal
Whenever an item (purchased or manufactured) goes into stock, a new transaction is created in the Inventory Ledger Distribution Journal.
The cost used for purchase order or job receiving transactions is the receipt cost described previously.
The cost used for a stock adjustment is the Item Costs form unit cost at the time the transaction is entered. The cost used for customer order return is the average for all shipments against the line item. (In the previous examples, the following new Average costs were posted to the Item Costs form Unit Cost fields when the PO Receiving function was posted.)
This table provides example costs for a purchased Item:
| Type | Cost |
|---|---|
| Material Cost | $2.25 |
| Labor Cost | |
| Fixed Overhead Cost | |
| Variable Overhead Cost | |
| Outside Cost | |
| Unit Cost | $2.25 |
This table provides example costs for a manufactured Item:
| Type | Cost |
|---|---|
| Material Cost | $1.19 |
| Labor Cost | $0.39 |
| Fixed Overhead Cost | $0.68 |
| Variable Overhead Cost | |
| Outside Cost | |
| Unit Cost | $2.65 |