Average Cost

The average cost method keeps track of the cost for each stock-type item. Each time you make a purchase, the average cost for that item is recalculated.

Whenever you sell an inventory item that has an average cost type, Sage 50 uses the average cost it has been tracking to compute the Cost of Goods Sold. The Cost of Goods Sold is the average cost times the quantity of the item sold. On a daily basis, an entry is made to the Cost of Goods Sold account encompassing all sales for the day.

Example-Average Cost

You buy three widgets for $2.00 each and three for $1.00 each. To get the average cost, add together the amount you paid for each item, and divide by the total number of items. The average cost would be $1.50

($9.00 / 6 Widgets = $1.50).

Example-Adjustments to Inventory

Now, three widgets are stolen from your warehouse. You would have to make an inventory adjustment through the Tasks menu. The average cost is still $1.50 because the average cost doesn't change when your inventory adjusts down.

Example-Cost of Goods Sold

You manage to sell your three remaining widgets for $6 each. The Cost of Goods Sold would be $4.50 or Average Cost ($1.50) times Quantity (3).