# Miscalculation of average cost

First I created PO for some basic quantities of raw materials and then started creating sales orders.
As on when the qty on hand becomes 0, I just add PO to match the quantity

Now
I need your help to understand my problem.

I have 3 level BOM.

First level is base formula to make a scented candle - the average cost is 13.05 for base. This is correct value as I did cross check the spread sheet.

2nd level. Base 13.05+ wrapper .25 = supposed to be 13.30, but showing 19.35. ( I have my PO to supplier for just .25 only)

3rd level = 2nd level + box 2.25 = supposed to be 15.55, but showing 1600.88

We had similar problems with another product. I just deleted all the production orders and recreated, problem was solved.

What am I missing here?
Does date of PO makes any importance here?
Does PO dates play a role in average cost, (even though the quantities are available)?

First, purchase orders and sales orders have no financial impact whatsoever. They are convenient tools for entering information. They might be useful for internal purposes, especially for copying to later sales and purchase invoices, which do have financial impact.

Second, average costs depend on the entire history of purchases or production of an item, plus any write-offs. Drill down on the quantity on hand to see all transactions that go into determining average cost.

Third, you may be making too many steps out of things. Do you ever have a candle without a wrapper? If not, the wrapper should be included in the candle’s definition. As I see it, the only reason to have your second level is if you obtain candles from one source and wrappers from another. Then you should use a production order to combine the two into a third inventory item: the wrapped candle. The same thing applies to the box. If the candles come to you from a supplier already boxed, then include the box in the definition of the candle inventory item. If you are adding the box for shipping, you might consider boxes as consumable shipping supplies rather than inventory. Or you could enter another production order for boxing of the candles. But then you need a third inventory item for the boxes, wrapped candle. I couldn’t tell for sure if that was your situation from what you said.

Fourth, your screen shots don’t help much, because they have been cut and pasted from multiple sources. To be useful, you need to show the full input screens, obscuring only proprietary information. Then explain what they are and why you think they show incorrect information.

Avg cost does not appear correct. e.g My one SKU stock was Nil , I have purchased 10 units at rate X…then Avg cost should come X …but it is showing less than X …Pl advice, where I went wrong?

Have you purchased any items of this SKU in the past? (before the stock level became Nil)

yes , I have been purchasing and selling same items regularly

I believe the average cost is over all time. Therefore, even though you reached a Nil balance, Manager still knows what you paid previously and is doing a complete average over all historical purchase prices as well.

You must have paid slightly higher for it this time than you have in the past, if the average cost is less.

but this would be meaning less for me … or rather it is misguiding to me as I do fix my selling price based on this avg cost …yes as time goes actual cost would go up .

Average cost is not the average price at which things were previously purchased adjusted by quantities purchased, although in some situations that would give the same result. It is the total value of the item’s subaccount in Inventory on hand divided by the quantity on hand. So when the quantity reaches zero, the average cost is undefined and is reported as zero.

@Aaviva, I suspect that what you are seeing is the result of a tax code having been applied on your purchase. The value of the goods would contribute to their average cost. The tax would be posted to the Tax payable account, offsetting tax you owe. This would have happened automatically if the purchase was entered via a payment, since all payment transactions are tax-inclusive. It would also have happened if the purchase was via purchase invoice and the tax-inclusive box was checked.

Can you post a screen shot of the transaction by which you purchased the inventory item?

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No, if qty = zero then Avg Cost = zero, the next purchase starts a new Avg Cost unrelated to the past.

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exactly thats what I wanted , I need Avg cost of inventory I hold , assuming FIFO method

Hi Tut ,
I guess what you said may be right , I have done some purchases with tax inclusive .
In below purchase invoice , I am buying IZU09 , first time , rate 20.03 includes 28% tax , then avg cost should be 20.03 if it comes inclusive VAT or should be 15.65 if excluding tax … but it comes 14.42 ( see below screen shots), pl advice how system calculates and where I went wrong

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No, the avg cost never includes refundable taxes (GST, VAT) regards of the invoice being processed as either tax inclusive or tax exclusive.

Agreed (15.65 x 1.28 = 20.03), however your first time purchase shows a qty of 144 but the inventory on hand is only showing a qty of 128, therefore, without knowing the transactions behind the qty of 16 difference its hard to say why the avg cost is only showing 14.42.

If you delete the transactions (one by one) relating to the 16, does the avg cost change ?

Infact Qty of 16 , are sales so far posted by sales invoice

Your statements are not consistent, @Aaviva:

• You said your stock level was nil and you then purchased 10 units. But you have shown a purchase invoice for 144 units.
• You said you have been purchasing and selling the same item regularly before its quantity on hand declined to nil, but your drill-down on the inventory item IZU09 shows the 144 units were your first purchase.

So you seem to be making statements that apply to different inventory items. Choose one item that illustrates the problem you think you have. Then provide us every bit of information about that item so we can consider a logical sequence of events. If that item is IZU09, show us those two sales invoices, since they seem to be the only other transactions regarding the item. And show us the Edit screens of transactions, not just the View screens, so we can see which accounts things were posted to.

i had terrific time with the miscalculation.

surprisingly, shortage of value/cost of child parts/BOM components adds additional to the final product.

couldnt figure out whats gone wrong.

sometimes when there are too many production orders, and trying to rectify the negative inventory things had gone wrong for me.
One thing i figured out was, if i replenish the stocks in this software after my inventory gone negative, the average cost gets me wrong values, but final values like inventory on hand etc are correct.

I just deleted the entries and redo everything. now things are fine.
so now im very careful and make sure that inventory doesnt go negative.

Avg Cost comes from Purchase Invoices and shouldn’t be affected by Sales Invoices. So we can isolate the situation can you do the following with Inventory Item IZU09:

1. Print off copies of the Sales Invoices so you have a record.
2. Delete those Sales Invoices so the Inventory Item only has the Purchase Invoice - what is the avg cost now ?
3. If still incorrect - post screenshot of the Purchase Invoice in “Edit” (not View) mode. You only need to show the whole Item/Account/Unit section, not the entire Purchase Invoice if you want.

Hi Brucanna,

AVG cost still same (incorrect ) after deleting those sales invoices

How to paste screed shot of purchase invoice in Edit Mode ?

Hi Tut,

I had mentioned purchase of 10 units as an imaginary example ,

IZU09 , first time purchase of 144 units , still Ave cost is not coming correct ? where I went wrong was the question

Click the edit button