How does moving average costing work?

This article is a simple illustration of how moving average costing works.

Here are some bullet points to get started:

  • The system calculates the average cost on a product per warehouse basis.
  • In each warehouse, average cost is calculated as:
    • Total Real-time Value / Total Real-time Quantity
  • The cost value for inventory draws is the current average cost as of the the exact time when the inventory is drawn on the transaction date.
  • There are a few events that can change the average cost for any given product:
    • Receive/add inventory at a cost that is different from the current average.
    • Enter an Adjusting Journal Entry to revalue an Inventory Lot.
    • Enter a landed cost during Voucher entry.
  • Selling or drawing inventory out of stock does not change the average cost.

Examples

Inventory Additions

In the table below we have some simple accounting for additions to inventory. Each line represents one Purchase Order, Work Order or Inventory Maintenance ADD transaction.

As you can see, each time inventory is added at a different cost, the moving average changes. In this example each unit cost is greater than the previous unit cost, so the moving average follows the same pattern.

  • Transaction Date: The date when the transaction occurred. This is equivalent to the Post To Date in AcctVantage.
  • Qty: The number of inventory units that were added.
  • Unit Cost: The cost per each unit of inventory.
  • Total Cost: Qty * Unit Cost
  • Moving Average Cost: The average cost for all units of inventory as of a specific date. This includes all inventory that was added previously.
Moving Average example

Inventory Draws

If we were to sell (i.e. draw) inventory out of stock, then the cost of goods sold will be the average cost as of the date & time when the draw occurs.

Examples:

  • If we sell 10 units on 1/31, CoGS will be $10,000.00, which is an average of $1,000.00 per unit.
  • If we sell 10 units on 4/30, CoGS will be $10,506.70, which is an average of $1,050.67 per unit.
  • If we sell 75 units on 6/1, CoGS would be 75 * $1,113.00 = $83,475.00  ... We might physically ship the first 75 units that we had in stock. However, the remaining 25 units would be valued at $1,113.00 each, NOT $1,300.00 each.

How do other costs in the system affect the moving average cost?

You may notice other costs on the Product record. These include Default PO Cost and Primary Vendor PO cost (among others). These are just default values. When a line item is added during PO Entry, these are the costs that will be used by default. The actual cost that is included in the moving average cost often differs from these default costs. Reasons for this include fluctuating costs from the Vendor, landed costs such as freight/handling that are entered on a Voucher and Adjusting Entries which adjust inventory value.

What about "built cost"?

If you have an assembly product you may notice a value named Built Cost. This value represents an estimated cost to built one unit of the assembly. The built cost includes the sum of the components' default PO costs plus any non-inventory costs plus a setup cost.

Since this is just an estimate to build a single unit, it's not a reliable indicator of the moving average calculation.