Lean Strategies International
Menu

Glossary

Would you like to add a term to the community? Click Here!

Average Cost Valuation

3/8/2022

0 Comments

 
Average Cost Valuation
Click on the Image to Subscribe to Our YouTube!
  The average cost method is an inventory valuation method used in accounting to calculate the value of inventory.  Put very simply it is the cost of all inventory items summed and averaged.
Click Here to Subscribe to Our YouTube Channel.
How is Average Cost Calculated?
  • The figure is calculated by dividing the total cost of goods by the total number of goods over a specific accounting cycle.  While you should speak with a professional accountant or a CPA to decide the best method of inventory valuation, the average cost method is easy to calculate and has many benefits. 
Benefits of Average Cost Valuation
  • One benefit is that the average cost method assigns a value to both the cost of goods sold and the cost of goods still available over a defined period.  The period is usually defined as monthly, quarterly or yearly. 
  • The average-cost method is one of the most straightforward ways to determine COGS over a specific period. 
Example
  • While this may not be critical to inventory management it will help you understand how inventory is valued when using the average cost.  In the Video you will see a company that sells goods.  This sales ledger shows our data for the first quarter of the year.  As you can see we first add up the total number of items and then we add up the total cost of all the items.  Next you would divide the total cost by the total number of items and this would give you the weighted average cost per item.  Now let’s imagine that this same company sells 50 units during this same accounting period.  You would then calculate the cost of goods sold by multiplying the number of units sold by the average cost.  Likewise you could calculate the cost of goods still available by multiplying the number of items remaining by the average cost per item. 
The main benefit of the average-cost method is its simplicity, especially for companies that deal with large volumes of very similar items.  On the downside, results can vary greatly from actual costs if your inventory costs are not stable. And that’s it, the average cost method of inventory valuation.  Remember, you should always consult an attorney, professional accountant or a reputable CPA before selecting your valuation method. 
0 Comments

Your comment will be posted after it is approved.


Leave a Reply.


    Glossary


    Subscribe below and receive lean, six sigma, operations, supply chain, logistics, distribution and business terms in your mailbox.

    CLICK HERE TO SUBSCRIBE

    Categories

    All
    #
    01. Add A Term
    3D
    3PL
    3P's
    5 Principles
    5S
    5 Why's
    6σ
    8 Wastes
    A
    B
    C
    D
    E
    F
    G
    H
    I
    J
    K
    L
    M
    N
    O
    P
    Q
    R
    S
    T
    U
    V
    VSM Shapes
    W
    X
    Y
    Z

    Archives

    March 2023
    February 2023
    January 2023
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    April 2020
    March 2020
    November 2019
    October 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    March 2018
    February 2018
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    November 2015

Lean Strategies International LLC.
Follow Us on YouTube or Our Other Channels Below.
             ©2015-2021 Lean Strategies International LLC.  
  • Home Page
  • Services
    • Training >
      • Waste Training
      • Introduction to Lean
      • Lean Champions >
        • Lean Six Sigma White Belt
        • Lean Six Sigma Yellow Belt
      • Lean Tools You Can Use Series! >
        • The 5S System
        • The ©Gemba Methodology
        • The FISH Methodology
        • The CURE Methodology
        • Quick Changeover with REDUCE
        • Mistake Proofing and the Poka Yoke System
        • The Just in Time System
  • Lean Resources
    • Listen to The Gemba
    • Glossary
    • Lean and Six Sigma Quotes
    • Recommended Reading
    • Events
    • Masters of Lean and Six Sigma
    • Career /Jobs
  • Store
    • Workspace
  • Home Page
  • Services
    • Training >
      • Waste Training
      • Introduction to Lean
      • Lean Champions >
        • Lean Six Sigma White Belt
        • Lean Six Sigma Yellow Belt
      • Lean Tools You Can Use Series! >
        • The 5S System
        • The ©Gemba Methodology
        • The FISH Methodology
        • The CURE Methodology
        • Quick Changeover with REDUCE
        • Mistake Proofing and the Poka Yoke System
        • The Just in Time System
  • Lean Resources
    • Listen to The Gemba
    • Glossary
    • Lean and Six Sigma Quotes
    • Recommended Reading
    • Events
    • Masters of Lean and Six Sigma
    • Career /Jobs
  • Store
    • Workspace