About the Average Costing Method

Average is a cost method that uses a weighted average of the costs of all items and maintains one actual, average unit cost for an item. 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 cost of inventory is maintained as follows:

When you receive a quantity through 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 through an 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 associated inventory account is reduced by the Unit Cost * Qty Issued or Shipped.

The new Average unit cost for each cost details component is calculated 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