Average Part Cost Calculation

The average cost is an estimate of part cost based on the average price of all purchases. It helps you with financial and inventory management decisions by providing a mechanism for cost reporting.

You can choose between two calculation logics to estimate the average part costs:

Standard calculation logic: Calculates the weighted average only when you fully close a purchase order.
New calculation logic: Calculates the weighted average of unit cost once you receive items, even if the purchase order is only partially received.

By default, the standard logic is activated. To activate the new calculation logic:

Go to Preferences > Purchase Order.
Click Calculate weighted average of unit cost on receipt.
Select Yes.

Calculation formula

Average cost calculation formula: ((invertory quantity * current average cost) + (received quantity * unit cost of new parts)) / (inventory quantity + received quantity)

Definition of variables:

Inventory quantity: The number of parts currently in stock.
Current average cost: The average cost of each part in inventory.
Received quantity: The number of new parts received.
Unit cost of new parts: The cost of each new part received.

New calculation logic

The new logic for calculating average part costs now considers both full and partial purchase order (PO) receipts and returns. It ensures accurate inventory valuation and updates and tracks average part costs to four decimal places, specific to each stockroom.

Receiving or transferring parts at $0 impacts the average cost. When the average cost drops to zero or turns negative, it might become less reliable in this calculation.

Purchase order receipts and returns

When you create a purchase order receipt with a positive or negative quantity of parts, the system now recalculates the average cost to reflect the addition or reduction of parts in inventory.

If you delete a receipt, the system recalculates the average cost to reflect the removal of the parts from inventory.

Stockroom transfers

When you transfer a part between stockrooms and its physical location changes, the system updates the average part cost.