1. Home
  2. Point-Of-Sale Software
  3. Cost Update Method for Item Cost

Cost Update Method for Item Cost

In MS RMS SO (2.0) I have selected "Weighted Average" for the "Cost Update Method" in File - Configuration - Inventory tab.

In the online help it reads: =============================Weighted Average: Select this method if you want Store Operations to update the item cost based on an average cost of all units of that item. When you receive new items, Store Operations adds the total cost of the unit received to the total cost of the existing units. This total cost is then divided by the total number of units on hand. For example, assume you have in stock 20 hammers that cost $10.00 each. You then order 10 more hammers that cost $12.00 each. If the weighted average cost method is selected, Store Operations automatically changes the cost to $10.67 when the 10 hammers are received. Look at the following computation:

Total cost = 20 hammers @ $10.00 each + 10 hammers @ $12.00 each = $320.00 Weighted average cost = $320.00 / (20 hammers + 10 hammers) = $10.67 =============================I've got three questions in regards to only using the TOTAL NUMBER OF UNITS ON HAND in calculating the weighted average cost: :

  1. Is this GAAP for cost calculations?
  2. If I had ordered, received, and sold 1,000 of the same items over the last 2 years, and therefore have nothing left on hand, next time I receive a PO with just 1 of that particular item on it the weighted average cost for that item will be updated to the current cost (since I didn't have anything on hand for this item). If for illustrations purposes the current cost price of this item is substantially different then the weighted average cost price for this item over a two year period. This would cause any report that I run for a previous time frame to use the current cost price and hence have completely inaccurate cost, and therefore profit numbers and margins, information on it.
  3. Shouldn't the Weighted Average Cost be calculated as Total Cost of all Units EVER Received / Total Number of all Units EVER Received ? This would keep historical profit reporting more accurate.

Am I missing something?

Reply to
Alex
Loading thread data ...

You've already sold the old inventory and therefore it is not factered into the weighted average of the new inventory purchased. The COGS would be what you paid for the new inventory and nothing else since there is nothing on hand to divide it into. This is how weighted average works. Craig

Reply to
Craig

I understand how weighted averages work, but RMS SO is talking about ON HAND weighted averages without explicitly stating so! If I am running a profit or profit margin report for lets say the last 2 years it might be completely of because it's using the current "on hand weighted average" opposed to the perpetual weighted average.

Reply to
Alex

That's not true. The COGS for items you already sold is in the database and that is what is used in the reports. For example, do a detailed sales report covering the last year and you will notice that the COGS for items sold a year ago may not be the same as the COGS for items sold recently. This is because RMS stores the COGS for historical sales. The COGS for items sold today is not applied to items sold a year ago. Craig

Reply to
Craig

Reply to
Akber Alwani

Reply to
convoluted

Reply to
Akber Alwani

I don't see a post from you on this thread Akber, so I'm not sure what you are talking about. Craig

Reply to
Craig

I want to thank everybody for explaining this to me (I stand corrected)!

Alex

Reply to
Alex

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.