Even with cost fluctuations, with Finale's weighted average unit cost algorithm, you'll always know how much you're spending for each product. Understanding the cost of each product will allow to gain insight the gross margin of your sales.
Understanding your costs and how your suppliers are performing will give you the leverage you need to drive down spend as you grow. It will also help you better understand the timing of important purchasing decisions.
Please watch this video to learn more about average product costing.
Finale calculates the average cost using the weighted average method, which is a generally accepted accounting principle. The average cost for a product changes with two types of transactions:
- Purchase shipment received: When a purchase is received the average cost is updated by adding the value of the current inventory for the product to the value of the product being received. For example, suppose the company currently has 100 units on hand at an average cost of 20 for a specific product. The company received a purchase with 50 units at a cost of 16. The total value after receiving the purchase is (100 × 20) + (50 × 16) = 2800. The new average cost is 2800 ÷ 150 = 18.67.
- Build completed: When a build is completed, the average cost of the product being produced is updated based on the value of the product consumed. For example, suppose again that the company currently has 100 units on hand at an average cost 20 for a specific product. The company completes a build of 50 units that consumes 200 units of each of three other products and the average cost of each of those products is 1, 2, and 3. The total value after completing the build is (100 × 20) + (200 × 1) + (200 × 2) + (200 × 3) = 3200. The new average cost is 3200 ÷ 150 = 21.33.
Other transaction types do not update the average cost of the product.
Updates to the average cost depend on the order transactions happen. Transactions are sorted based on the record date for the transaction which may not be the date the transaction was actually entered into the system. For example, on August 20 a user might mark a transaction as shipped but enter the ship date as August 14. In this example the system will treat the transaction as having been on applied on August 14 when updating the average cost. The record date depends on the specific transaction: it is the receive date for purchase shipments, the ship date for sale shipments, the commit date for stock changes, etc. For transactions on the same date, the system sorts then by the date and timestamp that the update was entered into the system.
It is important to not allow the quantity on hand for a product to go negative because the weighted average method produces results that don't correspond to reasonable expectations for a products value when the quantity on hand number is negative. For example, suppose the current quantity on hand is -10 and the average cost is 10 for a specific product. The company receives a purchase with 15 units at a cost of 20. The total value after receiving the product is (-10 × 10) + (15 × 20) = 200. The new average cost is 200 ÷ 5 = 40. Although 40 is much higher than either of the two previous cost values, the new value is dictated by the weighted average cost method. The solution for this issue is to identify why the quantity on hand is going negative and edit transactions earlier in the product's history to prevent the negative quantity.
Products can be used in transactions, such as stock takes or sale shipments, before an average cost is established. In that situation, the average cost for the product at the time of the transaction is unknown. If later a purchase shipment is received or a build completed for the product, then the cost of the purchase or build becomes the average cost for all units of the product. For example, suppose a stock take is entered for a product setting the quantity on hand to 20 units. At that time the average cost for the product is unknown. Later a purchase shipment is received for 2 units at a cost of 15. In that situation the new quantity on hand is 22 units and the average cost is set to 15. Once the average cost is established in this way, further transactions use the standard weighted average cost method for updating the average cost.