AVG Costing Method

We use the AVG costing method and I was wondering where does the system get the total cost, from PO or from Invoices?

I know the formula for AVG calculation is AVG Cost=Total cost/Current on-hand Qty. But where does the total cost number come from, PO or Invoice?

AVG cost is calculated “at the time” of receipt, so for purchase parts it is the PO Cost at receipt and for make parts at job receipt to inventory.

An important thing to note here, if it doesn’t go to inventory, the AVG cost is NOT updated. So make-direct, and I believe drop shipments, don’t update your AVG costs.

Mark W.

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Thanks! So the AVG costing for parts purchased are averaged throught the PO’s. My purcahsing director was asking because he was saying, that when the part was recieved adn invoices are entered that that should adjust the costing.

The reason that can’t be the case is timing. Parts can be consumed in jobs and shipped out the door before the invoice posts. No system that I know of will go back in time to update past transactions to correct for costs unless you’re a pure project shop that buys directly to projects.

Mark W.

Agreed. Thanks for all the info and confirmation.

Just more FYI.
I believe when an AP invoice with a different cost is received, the DIFFERENCE in accrued value is adjusted. But not the inventory nor the Parts average cost value.

(Where accrued purchases is the original PO Recpt extended average cost value)

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