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Moving Average Inventory Method

Young Woman Doing Inventory in Shop

It is essential that you know about the functioning of the moving average inventory methods. Each method generated different levels of profits and cost of goods sold, focusing on various elements. We know the most popular costing methods are LIFO and FIFO, where they focus on different variables to generate results.

To get the results between LIFO and FIFO method, organizations are nowadays using the moving average formula.

Why is the moving average Inventory important?

Choosing to use the moving average cost formula in your business ensures that your cost is always up to date. Companies focus on selling the products and reducing the existing stocks at hand as well. Usually, it gets easier to track the inventories when the goods can be counted individually or sold in bulk. Companies that deal in large quantities like liquids, nuts, nails, etc., can be pretty tricky.

When you already have stock in your inventory but also receive new lots, it is obvious that the new delivery will be different in price than the previous ones. In these cases, the moving average costs combine all the factors and generate a new selling price.

Using the moving average costing method, keeping track of the financial position gets easier and more efficient.
This method is also applied to generate the company’s gross profit margin by recording inventories, computing its’ assets, generating net sales, and the cost of the products sold.

Generating a moving average is complicated and not a time-saver always. But if you want to know about your business and products’ updated price, using the moving average pricing will give you a heads up.

Video Credit: Accounting Stuff

Tracking Your Moving Average Inventory Costs:

Moving average accounting helps the companies to generate financial results accurately. Companies are using automated computerized software and program to keep the tracks of your moving average costs updated. You can track it by using macro in a spreadsheet and update the values of the orders of your goods.

With advanced technology and systems, the manual recording is out already outdated. With Excel, you can set up the formula to continue the calculations in the same way with new changes of data from previous cells. But it also needs for the accountants to keep it in proper check.

Different software is designed for handling these crucial calculations meeting all the requirements for the business. Some of this software generates financial reports and analyses, but some of these also predict risks and generate different estimations and methods to meet the organizational goals better. With this software, you can simply differentiate the unit costs over time to time and so many more.

For your moving average cost calculation, divides the number of items in inventory by the total expense of the purchased goods. This way, the cost of ending inventory and the cost of goods sold to match the average cost. It does not require any extra cost layering like other costing methods. Multiple cost layering biases the results of the profit or cost of the goods sold. It becomes even more complicated when the company uses the stock from other purchase orders to meet the sales order.

It is necessary to record and count the landed costs into the cost of the purchased goods to get accurate results on your moving average calculations.

Moving average accounting keeps changing with the occurrence of new purchases, which makes this method only ideal for a perpetual inventory tracking system. In moving average price system keeping up-to-date records of inventory balances get more manageable because it captures and factors the records at the individual unit level. On the contrary, moving average cost calculation is not suitable for periodic inventory system as it gathers all the information at the end of every accounting period.

Moving Average Inventory Formula:

Moving average accounting eliminates all the extra costing layers to generate updated results. It recalculates the average cost per unit with additional stock purchase every time.

It will help if you are careful about recording everything in the exact amount and time. You can easily calculate the cost of goods sold by multiplying the amount of your sold products with your existing unit cost. All you have to keep in mind is keeping in mind about your unit cost after every PO; this method recalculates unit costs.
That is why it is more efficient to use this formula to generate your actual cost of goods sold no matter how many/many products you sell on an order.

You must know that the costs of goods sold will be different while using different costing methods (FIFO v/s LIFO v/s moving average) in a specific time or a financial year. It affects the revenue amount your business is reporting as well as the tax amount that you end up paying. So it is essential that you consider the facts and suitability of different methods to know which one will be ideal for your business by generating more profits.

Manually keeping records of costing and inventories is possible in managing small businesses. But if you want to expand your stocks and enterprises, it is crucial to choose a costing method that will generate upgraded financial records and predictions without any hassle.

With automated software for moving average costing, you can focus on different aspects of your business to meet your goals successfully and in a short time. You can also transfer these data, save them in cloud whenever you need.

You can get a lot of costing method software that comes with a default moving average systems. But most of this software works for small companies and businesses.

Big multinational companies develop their unique software for costing method calculations with their specifications and requirements that operate only at their suitable variables.

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