Supy currently offers its customers to choose between two methods for calculating inventory value: the Average Weighted Cost method and the Moving Average Cost method. In this document, we will provide a detailed explanation of both methods along with examples to illustrate their application.
The Average Weighted Cost method determines the value of inventory by calculating the average cost of each item based on its weighted average cost over a period of 365 days. This method adheres to accounting standards and provides a more accurate representation of inventory value.
Supy considers a period of the last 365 days to calculate average weighted cost.
The Item cost is calculated on a daily basis, taking into account the GRNs with this item of the last 365 days preceding the day.
Sum of (received qty * received cost) for each item / Total Received Quantity = Item cost
Example: ((Q1C1)+(Q2C2)+(Q3*C3))/(Q1+Q2+Q3) = item cost on day X
Current inventory value for item X = current item cost for item X * onhand quantity of item X
Example: Let's assume we are calculating the inventory value for a specific item called "Product A" using the Average Weighted Cost method.
Time period: Last 365 days
Purchase Cost of Product A:
Purchase 1 item cost: 10
Purchase 2 item cost: 12
Purchase 3 item cost: $11
...
Purchase X item cost: $14
Units Purchased
Purchase 1 quantity: 50 units purchased
Purchase 2 quantity: 30 units purchased
Purchase 3 quantity: 20 units purchased
...
Purchase X quantity: 25 units purchased
All these purchases are included in the date range of 365 days preceding the day.
Item Cost calculation: ITEM COST = [(Purchase 1 cost * Purchase 1 units purchased) + (Purchase 2 cost * Purchase 2 units purchased) + ... + (Purchase 365 cost * Purchase 365 units purchased)] / Total units purchased
ā [(10 * 50) + (12 * 30) + (11 * 20) + ... + (14 * 25)] / (50 + 30 + 20 + 25)
= 11.36
Inventory Value Calculation: = Item Cost * Onhand quantity
The Moving Average Cost method determines the value of inventory by calculating the average cost of each item based on the most recent purchases while considering the value of the current stock. This method provides a more up-to-date valuation of inventory.
In this method, the item cost is updated every time that a purchase is received (= GRN is created) and it takes into account the current inventory value to update the item cost.
Example
Current onhand quantity of item X = 150 units
Current item cost = 2 / unit
Current inventory value = 150*2 = 300
New GRN created:
Received quantity 100
Received price 2.5
ā New item cost = (1502 + 1002.5) / (150 + 100) = 2.2
We highly recommend to choose the "Moving Average Costing Method" because of its simplicity and its bias towards the most recent purchases which is more relevant for calculating your today's food cost. The "Weighted Average Costing Method" is relevant for food businesses wishing to operate as per this specified weighted average costing method as defined by international accounting standards set by IFRS.
