Average costing is a way of accounting for your inventory that assigns all units of inventory with a single cost price, which is arrived at by taking the average cost for all those units. It’s an alternative method to FIFO or LIFO, which use the actual prices paid for each unit, even when the costs fluctuate.
For retailers or wholesalers that acquire inventory from overseas, or multiple vendors, it’s not a great option as it won’t always give you the most accurate cost of inventory on your balance sheet.
Let’s walk through an example:
Now that there’s tools and software that automate all of the admin for you, there really is no need to operate using average costing. At Brightpearl, we operate using FIFO, which automatically tracks the exact costs paid for inventory (along with additional landed costs like insurance or freight), and will record the costs of goods sold automatically in a First In First Out order, meaning that you’ve got the most accurate financials and sales reports possible.