How OSAS Calculates Average Cost

By Larry Teren

Open Systems Accounting Software (OSAS) calculates average cost in the following formula:
(previous on-hand x previous average cost) + (new quantity x unit cost)
divided by total new quantity

An explanation:
In the standard PO module, when an item is received into stock, the last cost bucket is updated in the INLDx Item Location Detail File. In addition, the average cost is recalculated to account for the new inventory. If the previous average cost is 1.50 and there were 100 pieces in stock, and the new receipt is booked for a quantity of 20 at a unit cost of 1.55, the recalculation will look like this:

(100 x 1.50) + (20 x 1.55) / 120

this results in 1.5083 or 1.51 rounded. If more has been placed into stock, the new average cost will be higher.

Average cost is also updated through receiving into stock in the Daily Work Transactions routine in the IN module if you do not use PO or through the AP purchase entry when interfaced to IN.

It is important to make sure average cost is updated accurately because it is the most popular method for recording the cost of goods on a sale where there is no inventory on hand. This usually happens when an item is sold before it is received into stock.

Furthermore, the system needs to account for all in and out inventory actions. So, if there is no stock but a sale is posted, you will see a negative fifo costing record with the average cost as the unit cost (unless a different method is selected). When the item is finally put into stock, you will most likely end up with both positive and negative fifo records at different unit costs. This needs to be cleaned up as the system does not do it automatically.

Finally, some OSAS users utilize the BK module as well as the third-party MPM BOM system. Both provide the opportunity to add a finished assembly to stock through either a Build (BK) or Work Order (MPM). Besides adding fifo costing records, it also updates the average cost for the finished assembly.

For more answers to all your OSAS issues, call (773) 502-5771 .

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