About Posting - Average Cost Method

Posting of Costs At Receipt for Average Cost Items

The following transactions increase inventory on-hand quantities:

• Purchase order receiving
• Job receipt
• Job transactions posting
• Job material withdrawal
• Customer order return
• Stock adjustment
• Cycle count posting
• Miscellaneous receipt
• Physical inventory posting

An increase in inventory due to a purchase order receipt, job transaction, or miscellaneous inventory receipt is associated with a new calculation of the Average cost, which in turn is posted to the (Standard) Unit Cost field on the Items form.

An increase in inventory due to a customer order return, a stock adjustment, through cycle count posting, physical inventory posting, or from a job material withdrawal does not affect the value in the Unit Cost field.

The new Average cost calculation is:

AC = (OQOH * OAC) + (RQ * RC) / (OQOH + RQ)

where:

• AC = Average cost
• OQOH = old quantity on-hand
• OAC = old Average cost
• RQ = receipt quantity
• RC = Receipt cost

The Receipt cost (RC) in the calculation varies, depending upon the type of transaction being processed:

• When an item is received through the purchase order receiving function, the receipt cost default value comes from the Purchase Order Lines form's Unit Cost field.
• When a miscellaneous receipt is performed, you enter the receipt cost at the time the transaction is processed.
• When inventory is received from a job, the receipt cost is determined by the Shop Floor Control Parameters form's Costs Based on Complete field, the status of the job, and the Complete flag on the job's operations. If the receipt is being performed using a labor transaction on the last operation, you have the option of closing the job order. If the job is closed when the transaction is entered, the receipt cost used is always the Actual unit cost of the job.
• If the job is not closed and the Costs Based on Complete parameter is set to "Jobs," the receipt cost used is the Planned unit cost of the job. (The Planned unit cost is based on the setup, run times, and the rates from the Current Operations and Current Materials forms.)
• If the job is not closed, and the Costs Based on Complete parameter is set to "Operations," the receipt cost used is determined by the "Complete" flag of the job's operations.
• Actual costs from completed operations are accumulated while planned costs from incomplete operations are accumulated to determine the final receipt cost.

Posting of Costs At Issue for Average Cost Items

The following transactions decrease inventory on-hand quantities:

• Job material issue
• Customer order shipment
• Purchase order return
• Stock adjustment
• Cycle count posting
• Physical inventory posting

All issues out of stock are done at the item's Average cost at the time of the transaction, including the posting to the G/L Journal.

All of the Inventory reports that use cost information use the item's Average unit cost at the time the report is executed. The reports using cost information include:

• Item Cost By Product Code Report
• Item Costing Report
• Indented Costed Bill of Material Report

Related Topics

Costing Overview

About the Average Costing Method

Average Costing Setup

Examples: Average Costing