Average Inventory Cost in Dear and its differences to the Supplier Purchasing Price
What is Supplier Purchasing Price
Supplier Purchasing Price refers to the amount that is paid to the vendor in order to purchase the required item, ingredient that may or may not be sold in the future as inventory. A good example would be:
In the example shown above, a purchase order is made to purchase 50 Laptops from the supplier, all the expenses related to this purchase order are:
- Price (600 AUD per item, 30,000 AUD in total)
- Freight from America 2000 AUD
- Government Import Charge 1500 AUD (5%)
Therefore, the Supplier Purchase Price is 33,500 AUD.
What is Average Cost and how it is used in Dear
Average Cost (or weighted-average cost) is an inventory valuation method by which the owner of the inventory can value their stock on hand, either purchased from suppliers or produced internally. In Dear, Average Cost is used to estimate* (refers to Note 1) the value of the inventory.
In Dear, the Average Cost is used to:
- Estimating % Margin
- Estimating Finished Goods cost
- Setting price tire
To learn more detail about how Dear uses Average Cost , click Average Cost.
How does Dear calculates the Average Cost
In Dear, the Average Cost for any given inventory is calculated as Value on hand / Quantity on hand. To measure the value on hand, Dear uses the average purchase price plus any landed price.
A good example would be:
Assume company A purchased 700 laptops by two seperate purchase orders. Because of the nature of this product, only shipment fee will be considered as part of the landed price. Details of these two orders are as follow:
In this case, Dear will calculate the Average cost by: Value on hand (Total purchase price 250,000 AUD + 120,000 AUD plus total shipment cost 10,000+8,000) / Quantity on hand (500+200), which is roughly 554 AUD/Item.
In conclusion, the Supplier Purchase Price is the price that is calculated when purchasing inventory from suppliers whereas the Average Cost is used by Dear to estimate your inventory on hand.
Note 1 Dear does not use Average cost when calculating COGS, instead, Dear will, depends on the user's preference, uses other accounting costing methods such as FIFO or FEFO.
Note: the above images and figures are for example purposes only.
To learn more about the Average Cost, read the Average Cost article on Dear website.