Average Cost is the cost of the units continually averaged. The costs are averaged from the price on the PO at the time the purchase orders are received. See below. There are two kinds of average costs:
- Simple Average Cost which simply looks at the cost of a single unit against a cost of another single unit. For example, 10 units at $2.00 a piece and 20 units at $3.00 a piece, the quantities are ignored, while only averaging the dollar values. Therefore, the the Average Cost would equal $2.50.
- Weighted Average Cost factors in the quantity as well. 10 units at $2.00 a pieces = $20.00. 20 units at $3.00 a piece = $60.00. The total cost of $80.00 is then divided by all the units in stock, which in our example is 30. $80.00 / 30 = $2.67. Please note that the weighted average only weighs units being received against units that are currently in stock. It does not measure against units since day one. To calculate with a weighted average, select Average Cost as above and enable the client setting Use Weighted Average Cost for PO.
Note: PO shipping costs, or other third party costs, can be factored into the average cost as well. These cost can be averaged into the cost of an item to give an accurate profit and loss report by enabling the client setting Consider PO Extra Costs when Calculating Product Costs. For example, if the product cost $50.00 and shipping costs $5.00, the average cost on the product's Purchasing page (Product > Toolbox > Purchasing) will be $55.00. If you ordered 2 units with a total PO shipping cost of $5.00, the average cost will be divided among the units ordered, resulting in an average cost of $52.50.