The system recalculates the average cost of a product whenever a purchase order (PO) is received through the Receive by Shipment or Receive by Purchase Order processes. In addition, the system recalculates the average cost when transfer orders are verified in the receiving warehouse. In both cases, the on-hand quantities are updated as necessary.
Whenever a product is received, its average cost is based on the warehouse in which it is being received, not on all warehouses. In other words, every warehouse may have a different average cost for the same product.
The following formula shows how the system calculates the average cost of a product:
|
New Average Cost |
= |
(Current On-Hand Quantity X Current Average Cost) + (Received Quantity X Received Cost) |
|
On-Hand Quantity + Received Quantity |
For example, let's say the current on-hand quantity is 1, the current average cost is $2.00, the received quantity is 1, and the received cost is $3.00.
With the formula above, the new average cost is $2.50:
|
(1 X $2.00) + (1 X $3.00) |
= |
$5.00 |
= |
$2.50 |
|
1 + 1 |
2 |
Note: When the Receive by Shipment option is used, the system processes average cost updates based on the receiver data instead of the PO data.