The Average Cost (Avg Cost) field represents the average amount paid for items currently on hand and is used for calculating profit on sales. Unless the cost of an item or service is really zero, when entering new Inventory records an amount should always be entered in the Average Cost field. If an average figure is not available, enter the current cost (same as Last Cost) in the Average Cost Field.
When items are sold, the Average Cost is read from the Inventory database and stored with the Sales Transaction. The Average Cost (at the time of sale) is used to determine the Profit Margin and Cost of Goods Sold (COGS).
The Average Cost field is updated automatically whenever the Quantity On Hand is increased when Receiving items in Purchase Manager, Accepting returned items in Sales Manager, and using Automatic Case Break-Downs unless the Update Average Cost and/or Reset Average Cost Update Parameters are disabled in Purchase Manager in which case the Average Cost is not updated.
The formula used to calculate Average Cost is as follows:
New Average Cost = AvgCost * (QOH+QtyAllocated+QtyLayaway) + (PurchCost*QtyPurch) / (QOH+QtyAllocated+QtyLayaway+QtyPurch)
Warning: Do not leave a zero amount in the Average Cost field unless an item or service actually has no cost. Doing so results in inaccurate profit margins and incorrect Average Cost calculations. If the Quantity On Hand is not kept accurate (especially if it is allowed to become negative), the Average Cost may be distorted when it is recalculated. To prevent this enable both Update Average Cost and Reset Average Cost in the Purchase Manager Update Parameters so that Average Cost is reset to be the same as the Last Cost for items with a negative Quantity On Hand.
See:
Inventory Database - Main Screen Fields