Frequently asked questions
What is moving average cost?
It is a costing method that recalculates the average cost per unit after every purchase.
What is the formula for moving average cost?
New average cost = (value of stock on hand + value of new purchase) ÷ total units. With 100 units at 10 and 50 units at 12, the average is 1,600 ÷ 150 = 10.67.
When is the average recalculated?
After each purchase or receipt. Sales are costed at the current average.
How is it different from weighted average cost?
Weighted average is calculated once at the end of a period. Moving average updates continuously as stock arrives.
How does it compare with FIFO and LIFO?
FIFO uses the oldest costs first and LIFO the newest. Moving average smooths price changes. LIFO is not permitted under IFRS.
Which businesses use it?
Businesses with identical, interchangeable items, such as parts or commodities.
How does it affect COGS and profit?
It smooths price swings, so COGS and profit change less sharply than under FIFO or LIFO.
Does a sale change the average cost?
No. Selling at the current average leaves the unit cost unchanged until the next purchase. Only the number of units falls.
Should freight and duties be included?
Include them in the purchase cost if your policy adds them to inventory.
How do I handle returns and discounts?
Adjust the purchase cost or quantity and recalculate the average.
How do I handle several purchases?
Run the calculator after each one. Use the new total units and new average cost as the "on hand" figures for the next calculation.
How should I round?
Keep several decimals during calculations and round only the figures you display.
Is it accepted for tax?
Rules depend on the country. Ask your accountant which methods are allowed.
Can I price products from average cost?
Yes, but watch replacement cost. If supplier prices move quickly, the average may lag behind current costs.
Do accounting systems do this automatically?
Many do. Use this calculator to check results or to understand how the figure is built.