Much of the management work in a business involves tracking its value, whether in the form of cash or merchandise. One of the most important indicators for understanding your business's value and financial health is the average inventory cost. This is something you should include in any financial management routine.
Despite its importance, many people don't understand what this value is, how it's calculated, or what its purpose is. If this is your case, it's important to learn now so you don't miss out on important data about your business.
Follow and better understand what the average inventory cost is, its relevance, and how it should be calculated.
As the name suggests, average cost is a value obtained by dividing the total price of an inventory by the number of units. The result, here, is an approximation of the unit value of each product, which represents how much the company spent per unit acquired in a given period.
It's a simple calculation, but it makes a big difference in how you plan your inventory and finances. Therefore, it's important to collect this data regularly and compare it with information about your sales, whether in a company small size, whether in a large stock that requires constant monitoring.
The average inventory cost is a very important piece of data for the financial maintenance of your business, making your institution more competitive. See some of the benefits of maintaining this control.
A very important job in running a business is to look for reduce costsOr, from another perspective, to prevent these numbers from straying too far from the plan. Average inventory cost is a way to keep track of these values, as it allows you to identify points where there is a rise in unit costs.
Besides immediately signaling rising costs, this calculation is very useful for conducting a long-term analysis of your inventory costs. This is very useful for both identifying potential anomalies and defining solutions that can bring long-term returns to your company.
Naturally, keeping an eye on all your costs is crucial for a inventory management healthier, which includes the average cost per product. Even when you don't have a list of all the items and their individual prices on hand, you can still easily assess your expenses and how they relate to your merchandise.
In essence, calculating the average cost of a product in stock is quite simple, but it still reveals important information about your business. First, you should check the total cost of products in stock, as well as any items purchased during a given period.
Second, identify the total number of units in stock, as well as the total number of units purchased for a given amount. Finally, simply add up all costs and divide by the total number of units in the same period to obtain the average cost per product.
The formula is as follows:
CM = Total Costs / Total Products in Stock
To better clarify the calculation, let's use an example. Let's say that, at the beginning of the month, you purchase 100 units of a product for R$ 1,000. Following the formula above, we divide this Total Cost by the number of units purchased, resulting in an Average Cost of R$ 10 per unit of the product.
Now, let's say that, throughout the month, you purchased a new batch of 200 units for R$ 1,500. For the second batch, we divide 1,500 by 200 and we have R$ 7.50 per unit.
However, to obtain a complete average cost for the period, we need to combine all factors, adding the Total Cost of both purchases and the Total Products in both cases as well. The result is as follows:
CM = (Cost1 + Cost2) / (Products1 + Products2)
In our example, we add the two initial costs, 1000 and 1500, for a total of R$ 2,500. For the products, we add the first inventory, of 100, to the second, of 200, for a total of 300 units. Then, we divide the new total cost by the new total number of units, that is, 2,500 divided by 300. The result, here, is an Average Cost of R$ 8.33 for the period as a whole.
Ultimately, the average cost must be calculated regularly, that is, it must be part of the financial routine and management of the company. With this in mind, there are two modalities, each reflecting different aspects of your financial planning. Let's see what they are.
This method of calculating average cost takes into account only one inventory count, which is performed once a month. It's not the most effective method for keeping inventory under control, but it's a practical alternative for businesses that need to perform inventory counts manually. This ensures a bit more focus, as well as a comprehensive view of long-term costs.
Alternatively, the company can perform so-called rolling calculation, in which each new product purchased is also entered into the formula immediately. This method provides a clearer view of growth or reduction in inventory values, which can inform future acquisitions, even in the short term. It's also the most convenient approach if the business already monitors inventory on a regular basis.
Now that you better understand what average cost per product is and how it's calculated, you can start using this indicator in your planning. Regardless of your company's size, you have a lot to gain by collecting this data and conducting your own analyses regularly.
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