The inventory costing method are the way that is used by businesses to determine the final product’s total cost.
Bukku uses a weighted average track inventory. With this method, you use a pool of cost for all units of a particular stock keeping unit. Any purchase is added to the pool of cost, and the pool of cost is divided by all units you have on hand.
Formula:
Average Cost = Total Value / Total Stock on Hand
Let's illustrate this with an example.
Purchase 1:
On 02/01/2023, ABC Company purchased 10 unit of pens with the price RM 2.00 per unit. Total Purchase Amount = RM 20.00.
Purchase 2:
On 05/01/2023, ABC Company purchased 6 unit of pens with the price RM 2.20 per unit. Total Purchase Amount = RM 13.20.
Total Value of Pen = RM 33.20 ( RM20.00 + RM13.20)
Total Stock on Hand = 16 Units (10 Units + 6 Units)
Average Cost: RM33.20 / 16 = RM 2.075
Note: The average cost will always change every time you record a new purchase with a different unit price.
Sales 1:
On 09/01/2023, ABC Company sold 4 unit of pens with price RM 4.00 per unit. So the cost of sales / goods sold for this transaction is RM 8.30 (RM 2.075 X 4).
Note: Cost of sales will always take from the current average cost at the time the sales is recorded.