Item avarage cost vs. Inventory profit margin

I have noticed something in our figures that I am not sure whether it is a mistake in Manager or wrong recordings on our side.

As you can see here, the average cost of the item highlighted in blue is higher than the one of similar products:

By clicking on the Quantity owned of that item I get the following, which shows that we got 36 pieces and sold 30 of them:

However, if I go in the profit margin report and look for the same item, I can see that the Cost of sales is 1.026.898, which means 34.230 for each of 30 pieces sold:

In my opinion the Cost of sales should reflect the Average cost multiplied by the pieces sold, or am I wrong?

It appears that you have two invoices - 19/11 RRA & 7/12 Mar-te - adding to the Inventory Item without adding qty - this maybe ok if they are Freight-in charges.

To validate the current Avg Cost calculation you could go the Summary tab, click on the Inventory on hand balance and then click on the Prunotto Barolo 2014 balance, this will list the transactions related to it. Using the Debit total - divide it by 36 and what is the result.

You may need to rebuild the Inventory Items debit entries to correct Avg cost - delete and re-enter

You are not wrong, just incomplete. The average cost displayed is the current average cost. When multiplied by quantity owned, it gives the total cost of the item. This is the cost of what is currently in inventory. (The calculation is correct, revealing some accumulated rounding error in the third decimal place.)

The Inventory Profit Margin report is based on average cost at the time each unit was sold. Conceivably, this could have been different for every single unit, depending on price at purchase, freight-in allocated, timing of sales versus purchases, etc. In general, when stock is continually being purchased and sold, there is little reason to expect the current average cost to match unit cost of goods sold. Only if everything involved were purchased in one lot and all related acquisition costs were incorporated before the first sale would the two numbers match.

In fact, we puchased and imported this specific item only once and the purchase invoices from RRA and Mar-te represent import duties and transport costs, that is why they have no quantities.

This is why I find strange that the Avarage cost does not match the Cost of sales from the Profit margin report.

If we had received this item several times using several purchase invoice then yes, there would be differences between the two figures, but in this case they should match, no?

Look at the transaction dates in your second screen shot, @mauroskov. The initial purchase was on 07/11/2018. The additional costs from RRA were recorded on 19/11/2018 and distributed across all 36 bottles. 30 bottles were sold. Only on 07/12/2018 was the charge from Mar-te recorded. That last cost was distributed across only the remaining 6 bottles. This is exactly what I was referring to in the final sentence of my previous post. All related acquisition costs were not incorporated before the first sale, nor before the second sale.

Ok I see. Good point. Thanks, So this means that in order to have the average cost of this item to include also the cost from the last invoice from Mar-te (transport), I have to change its date to an earlier date. Or is there another workaround?

Under these specific circumstances, changing the Mar-te invoice to an earlier date, before any sales of the item were made, would apply the same average cost to all units, both those sold and those remaining in stock. But it is never a good idea to modify accounting data for such purposes. If you were ever to have a question or dispute concerning the Mar-te invoice, your records would be incorrect.

I wonder, however, why this is important to you. Without changing the Mar-te invoice, the Inventory Profit Margin report is correct for the period over which it was defined. You bought and sold units of the product, resulting in a calculated profit for that period of time. The result of the delayed Mar-te invoice is that units remaining in inventory carry a higher average cost. But by the time they are sold (assuming no more purchases), everything will balance out on an Inventory Profit Margin report for the longer time period. The first 30 bottles sold will be at a lower cost, the last 6 at a higher cost. But the profit margin for the longer period will be the same as if the original purchase, plus all customs and transport charges, occurred the same date and all bottles were sold at the same average cost.

All this is the result of using average cost method for valuing inventory. Other approaches are sometimes used in accounting, but average cost is the only one Manager supports.

Thank you for the explanation. For me average cost is sometimes a fast way to check what my cost of an item is and how much I should sell it for. We do create our long-term pricing using similar cost calculations in Excel, but sometimes I have some old stock that I want to sell for a lower price and in these cases I have often looked at the average cost in order to determine a possible discounted price. In this case though, if the 6 bottles left in my stock stay in the stock for long and I want to apply a discount, I might look at the average cost (which is higher than the average of the whole consignment of the 36 bottles) and be mislead by the higher cost of the last 6 bottles, which does not reflect the average cost of the 36 bottes. Does it make sense?

Yes, what you say makes sense. As I said earlier, this is the result of average cost inventory accounting. Some might consider that a shortcoming. In other situations, it might be considered an advantage. Either way, it is what is available in Manager. Now that you know how it works, you might reconsider where to look for guidance about what price to sell at. For that purpose, drilling down on the quantity owned and looking at the last few purchase invoices might be a better approach, rather than looking at the Inventory Profit Margin report, which is really confined to the units already sold.