What is average cost? Simply put, it is the total cost of any item that you produce or acquire, divided by the total quantity that you made or bought. This can be calculated for a given time period or it can be calculated continuously. This average lets you value the cost of your remaining inventory and determine your total sales profits. The continuous method or Moving Average Cost is the standard for small business inventory accounting. Stockpile make this easy for you by calculating this value with every transaction.
Let's look at an example:
In January, you start carrying speciality coffee mugs. You test the waters with an initial order of 100 mugs at a unit cost of $4.95. Your starting average cost is $4.95. These sell out fast for $12.50! Who knew? You made a total sales profit of $755 on your $495 investment. Encouraged by this, you buy 1000 more at a discounted rate of $2.75 and run a sale. Over the next week 232 mugs fly off your shelves at $9.95 each. So, where do you stand with this item?
You've bought 1100 units for a total of $3245 (100 * 4.95 + 1000 * 2.75). Your average cost for this item is now $2.95. Your total sales profits so far are $2379 and the remaining 768 mugs have a value of $2265.60. By knowing how much each item has cost you on average, you can make informed decisions about how to price your goods.
With Stockpile, our free online inventory system, all of this math is done for you. Stockpile gives you more time to make decisions about your business.
