Average Cost in DEAR is used for informational and estimating purposes only. It is displayed next to the price values on each Product screen.
IMPORTANT NOTE: Average cost in DEAR does NOT affect your P&L statement. All COGS calculations are done using accounting costing methods such as FIFO or FEFO. DEAR doesn't use the average cost method for P&L calculations at all. Once authorised, the invoice cost is available and distributed to all sales parcels (assuming you sold this product already) on FIFO (or Special) basic and the accounting records are updated accordingly.
Table of Contents
- Where Average Cost is used
- How Average Cost is calculated
- Changing an incorrect Average Cost
Where Average Cost is Used
Estimating % Margin
Average Cost is used to estimate the % Margin of your sales.
Estimating Finished Goods costs
Average Cost can be use to estimate the cost of a finished good. Products with Production BOM can only use Average Cost, while products with an Assembly BOM have multiple costing options. The Average Cost of the components, plus any other costs associated with the assembly/production, are added together to give the cost estimate.
Finished Goods cost estimating for Assembly BOM can also be performed using the Latest Purchase Cost and Fixed Purchase Cost. These are set from the Suppliers tab of the product.
NOTE: The value shown on this screen is for reference only. The true cost of a finished good (displayed as Most recent unit cost in Production → Finished Goods) is based on the actual purchase price of the components, according to the accounting method specified (FIFO, FEFO, etc.).
Setting Price Tiers
Average Cost can be used as a base price with which to calculate price tiers for your products. Other options for base prices are Fixed Supplier Price, Last Supplier Price, and Price Tier Value. See Pricing and Price Tiers for more information.
How Average Cost is Calculated
Average Cost in DEAR is calculated as Value on Hand/Quantity on Hand for every given product. It is calculated from the average purchase price paid for the products including any landed costs. All historical costs of an item are used by the system to compute the Average Cost. The selling price is not taken into account with this calculation. It is recalculated automatically whenever any inventory movement (buy, sell, etc.) happens to the product – specifically when the purchase invoice or sale invoice is authorised.
Average Cost is also affected by any Stock Adjustments/Stock Revaluation. When stock is revalued, the unit cost value entered becomes the new Average Cost (until it is affected by further movements).
If On Hand quantity of the product drops to 0, DEAR stops updating Average Cost and leaves the last value intact.
Changing an incorrect Average Cost
As mentioned above, the Average Cost shown on the Prices tab is for informational purposes only and is not used for COGS calculations. An incorrect Average Cost can either mean that the reference value is incorrect (but the inventory cost is correct) or that the stock is incorrectly valued (the inventory cost is not correct).
NOTE: An incorrect Average Cost can also arise due to a wrong Average Cost value being imported when setting Stock on Hand. If no transactions have taken place, the Stock on Hand action can simply be voided and re-uploaded. If transactions have taken place, these must be undone first before the Stock on Hand action can be voided and re-uploaded. Once the correct Average Cost value is re-uploaded, the transactions that have been undone can be re-authorised.
You can check the Unit Cost of the stock currently held using Stock Level Report (Reports → Product Stock Level) to check which scenario you have.
I am selling boots that should have a cost of 400 and I have 11 in stock. The Average Cost on the product details shows the wrong value.
If I go to Stock Level Report, I see a value of 400 for the unit cost – the underlying unit cost is correct, and just the informational Average Cost value is incorrect. This can be fixed by uploading a new Average Cost via the Inventory List (see below).
If the Unit Cost value is wrong, the underlying stock is incorrectly valued, which can be corrected with a Stock Adjustment/Stock Revaluation.
Uploading an Inventory List
Uploading a new Average Cost via an Inventory List CSV file only changes the informational Average Cost value. This does not affect the true cost of the stock.
- Navigate to Inventory → Products.
- Click Export → Inventory List.
- In the downloaded CSV file, change the Average Cost to the correct value.
- Upload the updated CSV file using Import → Inventory List.