>>>Hi,
>>>weighted average
>>
>>One method would be first to have a count and cost for all items current. Then, as items are added to inventory:
>>add 1 to item count
>>add item's cost to total cost
>>average cost = total cost/ number of items
>>
>>When items are pulled from inventory:
>>Total Cost=Total Cost - Average Cost
>>Item Count = Item COunt - Number of items
>
One thing I've learned about this (my company back home had one of these, both for sale and internal use) is that you never use average cost for anything but display. You always have the amount and total cost. If for any reason a partial amount goes anywhere, it takes with it its share of the total cost. If anything is added, it adds to amount and to total cost. The average is not stored anywhere - and it's not even used in calculations, unless there's an amount of 1, where it equals the cost.

In FIFO/LIFO inventory, especially those tied to job costing there can actually three (or more) cost centers. Typically, manufacturers will purchase (or fabricate) stock material in bulk. This allows them to assess a unit cost to the stock pulled (or returned) for jobs or workorders. The decimal places (significance) can go to the 1000th or 10,000th of a dollar (evun!).

An example of cost centers for a FIFO system would be First_In, Middle_In and Last_In. In FIFO, the only cost center that exhibits variance in cost is "Last_In". First_In, and Middle_In are locked out of receiving (thus unit costs remain the same .Middle_In is locked out of production (shipping) until First_In is consumed.

When First_In is consumed, Middle_In becomes First_In, Last_IN becomes the Middle cost center, and the Last_In [cost center] is zeroed (no stuff to cost). Incidentally, when a job returns a stockitem (the job was canceled), it is returned to Last_In at the [average] cost it was issued to the Job, and then, when the total cost of Last_In is divided by total Last_In units, we have a new average per unit cost for Last_In. It will stay that way until the next item(s) are received.

This scheme means that a workorder can pull stockitems with a different cost, and derive a total cost to the workorder and an average per unit cost to the work order.

How `bout an Example!!!!

Cost centers before [a] WorkOrder:
First_In count= 2 Total Cost = 2$ unit (avg) cost = 1$
Middle_In count= 3 Total Cost = 2.10 $ unit cost = .70$
Last_In count =4 Total Cost 3.20$ unit cost .80$

Now the job (or work) order pulls 3 pieces of stock.
It will pull 2 from First_IN at a cost of 2$
And one from Middle_In at a cost of .70$

Total cost of inventory pulled= 2.70$
Avg cost of inventory pulled=.90$

The affect the work order had on cost centers:
First_In count= 1 Total Cost = .70$ unit cost = .70 * from Middle_In
Middle_In count= 4 Total Cost = 3.20$ unit cost = .80$ * from Last_In
Last_In count =0 Total cost = 0$ Unit cost = 0 $ * empty cost center

Now, lets assume the Job return an Item (only needed two). The average cost issued to job was .90$. Here are the cost centers after job returned item:
First_In count= 1 Total Cost = .70$ unit cost = .70
Middle_In count= 4 Total Cost = 3.20$ unit cost = .80$
Last_In count =1 Total cost = .90$ Unit cost = .90$

* Note last in has 1 at 90 cents.

Now lets assume recieving just received 50 items for 40$. Add Last_In current count to received count = 51 total Last_In count @ a total cost of 40.90$, leaving us with an average per unit cost (in Lsst_IN center) of .80$.

Here's how the cost centers look:
First_In count= 1 Total Cost = .70$ unit cost = .70
Middle_In count= 4 Total Cost = 3.20$ unit cost = .80$
Last_In count =51 Total cost = 40.90$ Unit cost = .80$

At this point, the controller could merge Middle_In with Last_In (they have same average cost), or the controller could leave it alone an just let the mechanics of invertory manage it.

Some operations, especially those that buy in bulk (or have other variable cost considerations) to go great pains to understand their actual costs. In these cases, and average bulk cost (total cost / total items) will not provide the detail (and timelines) required for understanding their [actual] costs.

The costing rules are very stringent - and been around since Pharo rule Egypt!

Was this a bit over the top?:-)