Understanding your inventory

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AccountRight calculates your inventory's value by using the Average Cost method.

Unlike other valuing methods, such as First In First Out (FIFO), the average costing method values your inventory by calculating its average value, using the formula: Average Cost=Total Value of the item÷Total Quantity of items. Let's take a look at an example of how this would affect your inventory.

Example

Let's say you purchase 10 wine glasses for $10.00 each. This will result in an average cost of $10.00 per item.

The following day, 10 more wine glasses were purchased, this time for $12.00 each. Your inventory looks like this:

Total Quantity of win glasses: 20
Total Value of wine glasses: $220.00
Average Cost: $11.00 ($220.00÷20)

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For example, let's say you purchase 10 wine glasses for $10.00 each. This will result in an average cost of $10.00 per item.

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