Average Costing Calculation.pdf

AVERAGE COST CALCULATION The following method is used by the system to calculate an inventory item's average cost:

1. New Quantity Received X New Cost = INVENTORY VALUE AT NEW COST (A)

2. Old On Hand Quantity X Old Average Cost = INVENTORY VALUE AT OLD AVERAGE COST (B)

3. A + B = TOTAL INVENTORY VALUE (C)

4. Old On Hand Qty + New Qty Received = TOTAL INVENTORY QUANTITY (D)

5. C ÷ D = **NEW AVERAGE COST**

NOTES:

a) If new and old costs are the same, then there will be no change to the average cost.

b) If the old average cost is equal to zero, then the new average cost will be equal to the new cost.

c) If the old on hand quantity is less than or equal to zero, then the new average cost will be equal to the new cost.

If the Total Inventory Quantity is less than or equal to zero, then the new average cost will be equal to the new cost.

If new cost is equal to zero, then average cost will remain the same.