AccountRight uses the average costing method of inventory, which values your individual inventory based on the average unit price. The formula for calculating an item's average cost is:
Average Cost = Total Value of the item divided by the Total Quantity of the items
For example, a purchase of 10 items for $10.00 (tax exclusive) will result in an average cost of $10.00 per item. If the following day another 10 items were purchased for $12.00 (tax exclusive), then:
The total quantity of the items on hand = 20 items.
The total value of the items = $ 220.00.
The average cost of the items = $11.00 ($220.00/20)
Complications can sometimes occur if differently priced items are taken out of the inventory and others are returned, while the item's average cost would remain the same.
In the example above, say after the second purchase, 10 items were sold, the 10 remaining items would retain their average cost of $11.00 ($110.00 Total Value). If the remaining 10 items were to be returned to the supplier at a price of $12.00 each ($120.00 Total Value), then the debit purchase note will result in a:
- zero quantity, and
- a less than zero dollar value.
Because of the less than zero value, the negative inventory error will be displayed. To correct this, an inventory adjustment will first be needed to increase the Total Value of the items. The inventory adjustment will show zero quantity, a zero unit cost and a positive $10.00 in the amount column.