Legend tip - Understanding Average Cost

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Definitions

• Replacement Cost fields are generally updated from price files (manually in the absence of price files). Selling price is calculated off the Replacement Cost field for both Average and Replacement Cost systems. As a general rule, Replacement Cost values will be slightly higher than Average Cost values.

• Average Cost fields are updated only as parts are received. If a part number exists, and there have been no receipts, the part record will not have an Average Cost. 

• Last Purchase Cost fields represent the cost of the last receipt, and do not update Replacement Cost records.

Core records

Average Cost for cores is not calculated. Cores are posted using Replacement Cost values. If using Average Cost and a price file update includes core records, a manual journal entry is required to recognize the net gain or loss associated with the price updates for core values only.

Negative quantities 

Example 1: If a negative quantity sale is recorded before the parts are received into the physical, the system will use the Average Cost in the part record, even though there are none on hand.

Example 2: Assume quantity-on-hand of  2, Replacement Cost of $10,  Average Cost of  $8, 4 units are sold driving quantity negative (-2). The system will use Average Cost $8 x 4 units to relieve the general ledger inventory and create an immediate negative book to physical variance of $2 for each negative unit sold. When the two negative units are received at $10, the general ledger will be overstated by $2 for each negative unit sold.

Vendor Codes 91-95

Vendors 91-95 are used as Labor Part Numbers and controlled by Master Option lines 42-46. Vendor Codes 91-95 use Replacement Cost and do not track quantities or usage.

Return to vendor

The reference document created to return parts will value those parts using Replacement Cost.

Return purchase order

Return purchase orders will NOT adjust Average Cost based on the remaining quantity-on-hand.

Inter-branch transfers

Branches can have a different Average Cost for the same part number.

Example: Part X Average Cost at Branch A is $10 and at Branch B is $9. Branch B inventory recalculates Average Costed based on a $10 INBOUND receipt.

Sales returns

Sales returns debit inventory and credit cost of sales by the Average Cost at the time of the return.

Sales commissions

Sales commissions can be calculated on Average or Replacement Cost.

Part Transaction File

Represents the Average Cost of a single part at the time of the transaction, not the total Average Cost at the time of invoicing.

Kit build and explosion

The Explode routine will recalculate the Average Cost of the detail parts based on the current Average Cost of the kit, prorated across the detail parts according to the current Average Cost of the detail items. When a kit with labor is exploded, the labor is included in the Average Cost of the detail parts. The system prorates the labor across the detail parts in the kit.

Remanufacturing work orders

Debits cost of sales and credits inventory by the Average Cost at point of sale. Parts and labor are taken out of inventory to produce a finished product. The system makes a general ledger adjustment to credit labor inventory and debit inventory for the cost found in the labor record, if labor is included on the work order. The total Average Cost of all parts used on the remanufacturing work order becomes the actual finished cost. The system uses this new-finished cost to calculate a new Average Cost for the finished product. Total inventory value is not affected. Options are available to allow you to update Reman transactions at either Average or Replacement Cost.

Parts Order Entry (PO120)

On an Average Cost system, entering C in the quantity field in Parts Order Entry (PO120) DOES NOT change Average Cost which updates general ledger. This feature changes the cost for sales analysis reporting.

On a Replacement Cost system, entering C in the quantity field in PO120 DOES NOT change the replacement cost of the part in the inventory record but DOES update the general ledger with the cost entered.

Vendor drop-ship

Vendor drop-ship uses Replacement Cost, and DOES NOT update
inventory.

Other programs

There are numerous other programs that provide options and functionality to include or exclude both Average and Replacement Cost reporting fields.

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