SouthWare: Providing accounting & e-commerce software solutions

SouthWare: Providing accounting & e-commerce software solutions: "Know how average cost is calculated
Average cost for each stock item is calculated as a weighted moving average. The formula is:

(Curr. Avg. Cost x Prev. Quant.) + (New Cost x New Quant.) = Total Cost

Total Cost / (Prev. Quant + New Quant.) = New Avg. Cost

For example, say that an item's current average cost is $50 and that you have 40 on hand. Now you receive in a shipment of 100 @ $52 each. The calculation of the new average cost is:

[(50 x 40) + (52 x 100)] / (40 + 100) = [7200] / 140 = $51.43

This is the most commonly used method of costing because it most accurately reflects the actual cost you paid for the items you are selling."