Valuing goods at a warehouse by average price presupposes that the sum of the average price of a given item at the warehouse and its quantity is equal to the burdened purchase value - that is, the cost you paid for this stock.

With every purchase, the average price is calculated (changes) based on the following formula:

 where

Value_of_purchase = purchase_price + purchase_costs

The average price at a warehouse is therefore burdened - it consists of the supplier's price and the purchase costs (for example, transport, freight forwarding, handling costs...).

Issues from the warehouse are made by average price. The value of the issue is the product of the quantity and the average price. So if you issue the entire quantity, the stock at the warehouse will always be equal to 0 (rounding errors notwithstanding).

Let's look at an example of an imaginary item you're purchasing from a foreigner supplier:

Analyzing the Table

The prices marked in red changed upon purchase (as we saw above, the average price is only calculated for receipts, and is used for issued).

The average price does not only contain the purchase price (145 EUR), but also costs, giving us a total of 150 EUR. 

As you can see, despite the reduction of the price in the second purchase from 100 to 85 GBP, the average price has not gone down.

Why? Because you still had a fairly large stock (40 pieces) of the previous shipment, which cost you significantly more. If you were to calculate the price difference, you'd have to take into account the mixture of higher and lower prices - this is already accounted for in the formula for the average price.

Only after the last purchase did the average price approach the purchase price. Why? Because the stock was finally small enough so as not to have such a large impact on the valuation.

Average price: changes with each purchase is used to value issues, which do not change the average price is increased by purchase costs is not increased by a margin or tax (that is, is a net price) reveals the movement of stock (the less stock moves, the greater the difference between the purchase and average price) makes possible the calculation of the correct average price difference regardles of the different purchases prices of incoming items

How do I Set Valuation by Average Price?

To correctly value goods by purchase price, you must

1. Warehouse- first choose a warehouse where goods will be valued by average price

2. Receiving- you're ready to start creating receiving documents for these goods

3. Issue- issue the goods

4. Refresh Stock - before posting material consumption, it is recommended that you use the function for refreshing stock and and re-calculating valuation prices

5. Revaluation

General Functions:

• Stock

Related Topics:

• Valuing goods by FIFO Method
• Valuing Goods by LIFO Method
• Valuing Goods by Fixed Price
• Posting Stock by Retail Price
• Upward/Downward Revalution of the Value of Stock