# Cost Method: Average Cost

An example of a single material added to inventory with 0.00 units on hand and an initial per unit cost of \$1.25.

An adjustment is made to establish the material’s beginning balance, followed by a purchase, sale, and finally another purchase.

This table displays the quantity on hand and unit costs resulting from each event.

IN Materials (INMT)

Event

Date

Qty on Hand

Last Unit Cost

Avg Unit Cost

Std Unit Cost

Beginning Balance

0

1.25/ea

1.25/ea

1.25/ea

Adjustment Entry for Beginning Balance (100 @ 1.25/ea)

10/01/10

100

1.25/ea

1.25/ea

1.25/ea

10/04/10

200

1.00/ea

1.125/ea

1.25/ea

Sell 50

10/06/10

150

1.00/ea

1.125/ea

1.25/ea

10/07/10

250

2.00/ea

1.475/ea

1.25/ea

This table illustrates how the Average Cost method affects updates and the resulting value of Inventory. The Posted Total Cost represents the actual cost associated with each transaction, and the Change to Inventory represents the debit or credit posted to your GL Inventory Accounts. These two values always equal each other when using this cost method.

Event

Posted Total Cost

Change to Inventory

Ending Inventory

Adjustment Entry for Beginning Balance (100 @ 1.25/ea)

125.00

(100 * 1.25/ea) = 125.00

125.00

100.00

(100 * 1.00/ea) = 100.00

225.00

Sell 50

-56.25

(-50 * 1.125/ea) = -56.25

168.75