One of the difficulties small to medium business face is valuing their total inventory cost at any point in time. Keeping such records accurate is a must for a healthy inventory management to better serve the needs of its customers. There are various accounting principles that are used by a business, some of which are applied to keep track of goods sold and goods in stock. One of these principles is the average cost, wherein one of the methods is called moving average cost.
A moving average (unit) cost (MAC) is an inventory costing method wherein after each goods acquisition, the average unit cost of the item is recomputed. This is done by adding the cost of the newly-acquired goods or units to the cost of the units already in the inventory. This is then divided by the new total number of items. It is a way to calculate the ending inventory cost. It is a perpetual process as there will be purchases and sale of goods throughout the year.
Source: Business Dictionary
How is the MAC calculated?
Let us say a business (Jeans Inc.) is selling jeans and has 0 jeans in inventory when it started. At some point, Jeans Inc. placed a purchase order to acquire a 100 Jeans.
The purchaser order is as following:
100 Units of Jean, Purchase price: $10…Total: $1000
Shipping and handling, Price: $1000…Total: $1000
The above means that Jeans Inc. bought 100 jeans for a total of $2000 . The effective cost of a Jean is $20 although the purchase price is only $10.
Not only does the MAC value give Jeans Inc. a precise measure of its inventory at hand but it also gives an idea of how much the sale price should be to be profitable.
The MAC values are automatically updated after a Purchase order is fully received.
Consdierations for accurate MAC calculations:
When creating a new product within Stock&Buy, make sure you enter the initil cost value of the product.
If you are adding a new variation to an existing product, make sure you update the MAC value of the new variation:
To edit more than one variation cost, you can either perform a Stock take or bulk edit all the variations for which you would like to change the MAC.
Products imported from an online store (such as Shopify)
We highly recommend online store owners such as Shopify to update the MAC values of their products right after all the products are imported.