Accounting & Bookkeeping & Small Business Forum

[isaac_cm]

Hello,
Can any one tell me how to calculate average cost for item ?

thanks

[Tyson]

Issac:

The way to calculate average cost per item is to calculate the weighted-average of the items in inventory.

If you you bought 50 widgets @ $1.50, 100 widgets @ $2.00, and 150 widgets @ $2.25, and these are the only items in your inventory, then the average cost per item is:

Total Cost of Items in Inventory / Number of Items in Inventory

50 * $1.50 = $75.00
100 * $2.00 = $200.00
150 * $2.25 = $337.50

Total Cost = $612.50, Number of Items = 300

Average Cost per Item = $612.50 / 300 = $2.04

I hope this helps.

[RobJ]

I would add that there are occasions when the widget is changed prior to sale and it would be beneficial to add the additional cost when calculating the cost per unit. For example, a company may purchase an item "off the shelf", but needs to modify it prior to sale. The cost to modify the item would be added to determine the actual profitability of the item. It may not happen often, but it does happen.

[isaac_cm]

Tyson
what about sold items ? what about return sales and return purchase ?

I read a book about that and they calculate the cost of the sold item * previous average cost and subtract this from previous extended cost

Thanks

[RobJ]

If you want to be thouroughly confused, read this ... http://www.webcpa.com/article.cfm?articleid=26594. The issue of valuation will continue long after I'm dead and buried.

Tyson, the important question is ... why do you ask the question? Your answer will help us guide you in the right direction without making your head spin.

[isaac_cm]

RobJ
Sorry I dont understand what you mean ??? what information you need from me ?

do I understand that calculating average cost based of purchased goods only is correct ?

Thanks

[RobJ]

isaac_cm wrote: RobJ
Sorry I dont understand what you mean ??? what information you need from me ?

do I understand that calculating average cost based of purchased goods only is correct ?

Thanks

Before I make this more complicated than I already have, did you get the answer you were looking for?

[isaac_cm]

I found an answer in an inventory book, as I understand the average calculated like that

average (1st date) = (Net change in qty*) * cost price / qty in hand

* Net change in qty = (current qty in hand - previous qty in hand)

if Net change in qty <0>= 0 then
extended cost = previous extended cost + (Net change in qty * current cost price per unit)

Is this is correct ?, however I dont know what I should do in those cases:
- purchase return
- sales return
- moving item from inventory to another one.
- adjusting item qty

Thanks

[RobJ]

isaac_cm wrote: I found an answer in an inventory book, as I understand the average calculated like that

average (1st date) = (Net change in qty*) * cost price / qty in hand

* Net change in qty = (current qty in hand - previous qty in hand)

if Net change in qty <0>= 0 then
extended cost = previous extended cost + (Net change in qty * current cost price per unit)

Is this is correct ?, however I dont know what I should do in those cases:
- purchase return
- sales return
- moving item from inventory to another one.
- adjusting item qty

Thanks
For a purchase return, <dr> cash and <cr> COGS (cost of goods sold). For a sales return, <cr> cash and <dr> sales or sales returns. Can you give me an example of "moving item from inventory to another one". For "adjusting item quantity", do you mean for damages or theft?

Why do you want to calculate the average cost? Do you account for large items (like engines) or small things (like marbles)? Do you want the average cost so management knows if they are charging enough or to value the inventory on a periodic basis? What size business do you work for - # of employees and annual sales? Your original question seemed very simple and straight forward. It's not clear to me now that that was the case. The answers to these questions will help.

[isaac_cm]

Quote: Why do you want to calculate the average cost? Do you account for large items (like engines) or small things (like marbles)? Do you want the average cost so management knows if they are charging enough or to value the inventory on a periodic basis? What size business do you work for - # of employees and annual sales?

- I am a programmer I need to add average cost to my application
- The application is for local and small to medium stores all need an average cost evaluation of the quantity in hand

example of moving item,

Date------From inventory------item----------To Inventory-------Qty Moved
2/5/2008---branch 1-----------Item 1--------branch 2------------23 etc...


about adjust qty yes it is for theft and damaged goods, I need to know how this affect on the avg

sorry but I dont understand what you mean here
Quote: For a purchase return, <dr> cash and <cr> COGS (cost of goods sold). For a sales return, <cr> cash and <dr> sales or sales returns

Thanks for your concern

[RobJ]

isaac_cm wrote: - The application is for local and small to medium stores all need an average cost evaluation of the quantity in hand

Inventories are generally valued at the end of a period - quarterly, semi-anually, or annually. A company counts the inventory on hand and then makes an adjusting entry to reduce or increase the quantity on hand and, by extension, the value of the inventory.

If a company is calculating the average cost of an item from day-to-day, the average cost is based on purchases. Damaged items and theft shouldn't affect the average cost. After doing a periodic counting of the inventory, if the value of the inventory has to be reduced, the cause is generally due to damages or theft.

Does that help?

Rob

[isaac_cm]

sure I appreciate your help but correct me if I am wrong,

1- I will calculate avg cost only on purchases during every day evaluation , are you sure that other application do that ?
2- final average cost on the end of the year can be calculated from purchases and sold items ?

finally if you have time please explain what I should do for refund and quantity adjusting in the case no 2

Thanks alot

[RobJ]

isaac_cm wrote: 1- I will calculate avg cost only on purchases during every day evaluation , are you sure that other application do that ?
When you say "every day evaluation", will the stores be using bar codes? If so, that assumes that they will be tracking each item. If so, that assumes a perpetual inventory system and that's entirely different from Weighted Average.

isaac_cm wrote: 2- final average cost on the end of the year can be calculated from purchases and sold items ?

finally if you have time please explain what I should do for refund and quantity adjusting in the case no 2
There are several methods of calculating the value of inventory. The most common are FIFO, LIFO, and Weighted Average.

Under the Weighted Average method, the average is calculated at the end of a period - quarterly, semi-annually, or annually. Using this method, the COGS (cost of goods sold) is divided by the number of items in inventory to get the weighted average. The value of COGS is obtained by taking the value of the inventory at the beginning of the period (quarterly, semi-annually, or annually) and adding any purchases and other related costs (such as labor) that occurred during the period.

When an item is purchased, the cost becomes part of COGS. COGS is not affected when an item is sold, damaged, stolen, or returned. However, the physical inventory (number of items on hand) is affected. When a purchase is made, the number of items on hand increases. As items are sold, the number of items on hand decreases.

If an item is damaged or stolen, the number of items on hand decreases. The value assigned to the damaged or stolen item depends on the method used to value inventory. Under FIFO, it's assumed that the item was one of the earliest items purchased and the cost determined accordingly. Under LIFO, it's assumed that the item was one of the last items purchased and the cost determined accordingly. Under Weighted Average, the cost of the item is determined by the weighted average. Some companies also use their profit margin to determine the value of the damaged or stolen items. If the profit margin is 100% and an item sells for $10, they write-off $5.

Adjustments for damages, theft, and transfers are typically recorded as recognized. There are times that they are not discovered until a physical inventory is conducted periodically (quarterly, semi-annually, or annually). Adjustments made for damaged or stolen items are done manually. Software may have an option to make the manual adjustment, but it's generally not automatic except in the case of a bar-coded system.

I'm sorry that this is so lengthy and detailed. Here is a link I found that might put what I've said in a different light and help you further.

http://www.middlecity.com/ch06.shtml

Don't hesitate to ask for clarification.

Rob

[TSTANFORD]

I AM IN ACCOUNTING 1. WE ARE LEARNING FIFO,LIFO.ETC...
I CANNOT FIGURE OUT HOW TO CALCULATE MOVING AVERAGE HERE IS THE PROBLEM
6/1 BALANCE 1500@24
6/8 SOLD 500@40
6/10 SOLD 900@ 44
6/14 PURCHASE 800@ 26
6/24 PURCHASED 700 @ 30
6/29 SOLD 600@ 50

COG AVAILABLE FOR SALE 77800
UNIT SOLD - UNIT AVAILABLE FOR SALE= 1000 ENDING INVENTORY

SHOW MOVING AVERAGE UNDER A PERPETUAL INVENTORY SYSTEM???? PLEASE SHOW WORK :o