Average Cost

Average costing is described as follows: the average cost of all inventory on hand for any given part. While that might seem like a rather simple description, it does entail a rather complex series of calculations.

Take for example if you had 100 pieces in stock that were received at a dollar each, the average cost of all inventory (assuming it’s the only inventory on hand) would be one dollar each. Now let’s say those 100 pieces were still on hand, when another 100 pieces or received at two dollars each. Your total inventory value in this case would be $300.00 or 200 pieces at $1.50 each. Your average inventory cost would be updated to reflect the new average cost.

Now if you were to use 50 of those pieces, you would issue those parts to a job at $1.50 each (the current average) or a total cost of that job of $75. The 150 pieces that remain in stock, are still there at the average of $1.50, so your total inventory including work in process for that part remains 200 pieces at $1.50 or $300.

While this all might seem a little bit confusing it’s really pretty straightforward…. As it’s always about getting the costs straight when issuing the materials to manufacturing, and keeping your job costs correct. If you would like to discuss this further please give us a call at your convenience. Were always happy to take the right amount of time to make sure that you’re on the right path with your system.

Best regards
Dave….your pcMRP guy

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