Costing Methods (continued)
Average Costing
Average costing is a method of calculating part cost by warehouse based on the cumulative journal activity for a given part. All receipts, issues, physicals and adjustments are cumulated as of the date of the costing to determine the average cost of a given part.
How is the Average Cost Determined?
The unit cost of an item is the average value of all receipts, issues, physicals, and adjustments of that part to inventory, on a per unit basis. Issues from inventory use the current average cost as of the date of the issue to calculate the unit cost.
The inventory is valued at an average cost, weighted by quantity (inventory cost = average unit cost * quantity). Each warehouse may have a different average cost based on the complete journal activity of the part in the warehouse.
Perpetual Recalculation of Unit Cost
For the transactions listed below, the transaction unit cost may be different from the current unit cost for an item. In such cases, after the transaction has been processed, the item's unit average cost is automatically recalculated. As a result, at any time, inventory is valued at a current, up-to-date average unit cost.
·Purchase order receipt
·Return to vendor
·Transfer between warehouses
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