Adaco: Inventory Valuation Method: Average Cost

Overview

The Average Cost valuation method takes the weighted average cost of a product as the inventory value of that product.

• Open Inventory and Cost for each Outlet (see Fig.1)

Fig.1 - Inventory and Cost for each Outlet

Referencing the Product Bin Card Report we can see the opening value of this product in the Storeroom (see Fig.2).

Fig.2 - Opening value of product

Now we receive ten cases of product 1904 today into the Storeroom, with an increased cost of $125.00 per case versus the previous $120.00 per case. The on-hand inventory in the storeroom then recalculates based on quantity received and new cost (see Fig.3). You will note that the Restaurant and Bar inventory cost has not changed.

Fig.3 - Recalculated costs

When referencing the Product Bin Card Report, we can see the inventory cost increase (see Fig.4)

Fig.4 - Inventory cost increase

When the Bar now requisitions product 1904 from the Storeroom, and the Storeroom posts the transaction, the goods received into the Bar are recorded at the inventory value of the Storeroom. The Bar’s Product Bin Card Report then shows this update to the inventory value on hand (see Fig.5).

Fig.5 - Inventory update

As a reference, the Product Bin Card for the Storeroom also shows this transaction as seen in Fig.6

Fig.6 - Product Bin Card Reference

Next, when posting a backdated transaction (such as the Purchase Order highlighted in Fig.7) the cost will update and recalculate from the posted date forward against inventory on hand.

Fig.7 - Backdated transaction 

The system then takes the +/- change in value and recalculates all transactions from that date forward for the specific outlet with that outlet’s inventory value.

At month-end when we have opened the period inventory, any “inventory” period transactions until the period is closed, are recalculated for all applicable outlets in regard to inventory value of goods.  When posting to “current” period, all inventory cost remains the same but the “stock status” amends the price for the “current” period. When the period inventory is then closed, the system recalculates the current period inventory cost to ensure you are starting the new period with the correct on-hand inventory cost.