Average cost is fraught.
I don't think there is a way around the scenario:
- 100 in stock @ $5 each average cost (value $500)
- adjust all of them out (no effect on average cost)
- receive 1 at $10, so average cost is now $10 each
- adjust the 100 back in. Inventory is now worth $1010.
We have a manufacturing system, which makes it easier to justify using the
much cleaner standard costing system, although it is more acceptable to call
it "standard replacement cost".
Agree - if you are batch controlled, it is best to keep all the costs of
every batch, so you can then report on actual cost. Trouble is, you should
not try to keep valuation at actual, because invoices or other costs may not
come in until well after the goods have been sold. Keeping the actual per
batch means you can report on actual at a later date, once all the costs are
in.
If you use anything except standard (replacement) cost, and keep General
Ledger asset accounts up to date, you have to post revaluation of inventory
with every receipt. Messy.
Trouble is, some accountants are uncomfortable with standard (replacement)
cost, as they feel it is too complicated - they could not understand it at
university, and now it looks hard. Pity, when good analysis of variances
makes this a really good management tool!
My 2 cents.
----- Original Message -----
From: "Brutzman, Bill" <[EMAIL PROTECTED]>
To: <[email protected]>
Sent: Wednesday, August 29, 2007 8:53 AM
Subject: RE: [U2] Moving Average Cost
We have done a lot here recently with inventory valuations.
Why care about "Moving Average Costs". Consider using receivers as lot
numbers and
do actual costs of what is there.
We do our valuations on a monthly basis. If weekly or daily costs are
needed, consider saving this daily data to a little database.
I guess that we could talk about it...
--Bill
973.471.7770 x145
-----Original Message-----
From: [EMAIL PROTECTED]
[mailto:[EMAIL PROTECTED] Behalf Of Baker Hughes
Sent: Tuesday, August 28, 2007 2:33 PM
To: [email protected]
Subject: [U2] Moving Average Cost
Hey,
I have a distribution/manufacturing question. Could some of you share
your formula for calculating Moving Average Cost.
Consider:
Assume you are receiving stock into the warehouse, and recalculating
your new average cost upon each receipt (which later serves as basis for
your cost-plus price quote, but that's immaterial to the formula).
Since you also have negative stock movements (cycle count inventory
adjustments, or adjust quantities on- purchase receipts) should you not
use the absolute qty and absolute cost of the movement, when calculating
your moving avg cost?
Formula A:
Extended.Cost.Rcpt = Qty.Rcvd * Cost.Ea
Total.Inventory.Value = (Qty.OH * Old.Avg.Cost) + Extended.Cost.Rcpt
Total.QOH = Qty.OH + Qty.Rcvd
New.Avg.Cost = Total.Inventory.Value / Total.QOH
Ex. 1 - a positive Qty Received:
Extended.Cost.Rcpt = 10,000 * 2.8242 [28,242.00]
Total.Inventory.Value = (11,000 * 2.8215) + Extended.Cost.Rcpt
[59,278.50]
Total.QOH = 11,000 + 10,000 [21,000]
New.Avg.Cost = 59,278.5 / 21,000 [2.8227]
Ex. 2 - a negative Qty Received (Adjusted):
Extended.Cost.Rcpt = -10,000 * 2.8242 [-28,242.00]
Total.Inventory.Value = (11,000 * 2.8215) + Extended.Cost.Rcpt
[2,794.50]
Total.QOH = 11,000 - 10,000 [1,000]
New.Avg.Cost = 2,794.50 / 1,000 [2.7945]
Formula B:
Extended.Cost.Rcpt = ABS(Qty.Rcvd) * ABS(Cost.Ea)
Total.Inventory.Value = (Qty.OH * Old.Avg.Cost) + Extended.Cost.Rcpt
Total.ABS.QOH = Qty.OH + ABS(Qty.Rcvd)
New.Avg.Cost = Total.Inventory.Value / Total.ABS.QOH
With Formula B the new.avg.cost would be the same for both Ex. 1 & 2
TIA,
-Baker
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