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 through 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 is displayed in the Unit Cost field on the Item Costs form, 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 through 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 new Average unit cost is calculated 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 and 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 and is displayed on the Items form.
Cost Details
| 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 order return is the average for all shipments against the line item. (In the previous examples, these new Average costs were posted to the Item Costs form Unit Cost fields when the PO Receiving function was posted.)
Purchased Item Example
| Type | Cost |
|---|---|
| Material Cost | $2.25 |
| Labor Cost | |
| Fixed Overhead Cost | |
| Variable Overhead Cost | |
| Outside Cost | |
| Unit Cost | $2.25 |
Manufactured Item Example
| Type | Cost |
|---|---|
| Material Cost | $1.19 |
| Labor Cost | $0.39 |
| Fixed Overhead Cost | $0.68 |
| Variable Overhead Cost | |
| Outside Cost | |
| Unit Cost | $2.65 |