Welcome to Ordoro’s comprehensive guide on calculating weighted average unit costs for your products! If you’re looking to gain a clear understanding of how to determine the weighted average unit cost for the items in your inventory, you’re in the right place!
Whether you’re a business owner, a retailer, or just someone interested in inventory management, this article will break down the process in a simple and easy-to-follow manner. Join us as we delve into the world of inventory costing methods and learn how Ordoro can help streamline your operations and ensure accurate cost calculations.
Topics
- What is Weighted Average Unit Cost?
- Enabling automatic Weighted Average Unit Cost calculation
- How Ordoro calculates the Weighted Average Unit Cost
- Example calculation
What is Weighted Average Unit Cost?
Weighted average unit cost is a measure that takes into account not only the cost of a product but also the quantity of that product on hand. Unlike a simple average, where each product has the same weight, the weighted average unit cost considers the actual distribution of costs across different products based on their quantities.
Enabling automatic Weighted Average Unit Cost calculation
1. Click on your Company Name -> Account Settings.
2. Find Recalculate Weighted Average Unit Cost upon goods receipt at the bottom of the page. Click the checkbox next to it and then click Save.
You can also select Include Shipping and Handling, Tax, and PO Discounts in the calculations.
Notes:
- The PO level fees and discounts are divided evenly across the total PO quantity and are not weighted against the line cost total, etc.
- Example: If the S/H is $1000 on a PO with two lines, and both lines have reorder quantities of 100 but one line has a unit cost of $50 and the other $.05, the recalculated cost will change from $50 to $55 and from $.05 to $5.05 respectively.
- If there are PO line discounts, the discount is split evenly by the quantity.
- Example: If there’s a $10 discount for a line of 10 items, each item gets a $1 discount.
- These calculations are based on the total items ordered in the PO, not what’s left to be received.
- Example: If we have a PO with 2 lines, each comprising 10 items, and we receive 3 items from one line, then 30% of that line’s discounts are considered. Additionally, for the Weighted Average Unit Cost calculation, 15% (since 3 out of 20 total items on the PO) of the overall PO-level discounts and fees is included.
- Over-received items are excluded from the calculations.
How Ordoro calculates the Weighted Average Unit Cost
Weighted Average Unit Cost is calculated by dividing the cost of available goods by the number of units for sale.
When this feature is active in your account, Ordoro multiplies the Total Physical on Hand quantity with the stored Weighted Avg Unit Cost and then divides by the Physical on Hand quantity.
Your Weighted Average Unit Cost updates in Ordoro when you receive Purchase Orders for your products. Learn how to create a Purchase Order in Ordoro here.
Upon receiving a product on a Purchase Order, Ordoro recalculates the item’s Weighted Average Unit Cost using the following calculation:
When your Ordoro inventory reaches zero or goes negative, the Weighted Average Unit Cost for that product will be determined only by the Supplier Unit Cost in the received Purchase Order.
Ordoro also saves the Weighted Average Unit Cost to 10 decimal places, although this will not be shown within the application.
Example calculation
Let’s check out this Krull DVD to see how the Weighted Average Unit Cost calculations work.
Prior to receiving a Purchase Order, this product has a Weighted Average Unit Cost of $5 and a total of 10 units physically on hand.
We generate a Purchase Order for this product, ordering 10 items at a Supplier Unit Cost of $10.
Upon receiving the product, the following calculation will be implemented. This calculation is performed each time you receive a product through a Purchase Order.
Click the GIF below to watch the calculation in action.
After the calculation, the product’s Weighted Average Unit Cost is displayed as $7.50.
