Average Cost Calculation Methods

Average Cost Calculation Methods

Average Cost Calculation Methods Overview

Calculating average cost helps maintain a consistent value for inventory over time, accounting for fluctuations in purchase prices. It ensures accurate profit and loss calculations when items are sold and supports informed decision-making for pricing, budgeting, and inventory management.

FTX Cloud POS enables the calculation of the average cost. The “Avg. Cost Calculation Method” configuration option allows you to choose between two methods:

  1. Weighted Average Cost
  1. Moving Average Cost
NotesThe auto calculation of average cost can be enabled through a setting located in the General Settings section under the Product/General tab. This setting appears as a drop-down menu and is available only when Enable Average Cost is turned on.

1. Reaching "Average Cost" Settings & Configurations

  1. Step 1: Log into Control Center
    Step 2:     Choose     Point of Sale
  2. Step 3: Choose Maintenance
  3. Step 4: Choose Settings & Panels
  4. Step 5: Choose POS
  5. Step 6: Choose Product General Settings
  6. Step 7: Scroll Down to General Settings
InfoPoint of Sale>>Maintenance>>Settings & Panels>>POS>>Product General Settings>>General Settings.
  1. See Figure 1.1 to understand the navigation better.

                                                                          Figure 1.1

2. Enabling Average Cost Setting

All the average cost settings can be configured when the Enable Average Cost toggle is enabled. The following toggles are visible only when Enable Average Cost is enabled.

1. Enable Average Cost: Toggle to turn the average cost calculation feature ON or OFF. When enabled: 

2. Avg. Cost Calculation Method allows selection of the method to calculate average cost (Weighted or Moving Average). Weighted is selected by default. If weighted average cost is selected, the average cost duration appears.
  1. Average Cost Duration allows you to set the period over which the average cost is calculated. This option works only with the weighted average cost calculation method.
  1. Weighted Average Cost setting screen


                                 Figure 2.1
  1. Moving Average Cost setting screen

                                Figure 2.2
3. Include Adjustments in Avg. Cost Calculation adds applied adjustments to the average cost calculation.
4. Include Transfers in Avg. Cost Calculation adds applied transfers to the average cost calculation.

3. Average Cost Calculation Methods

These methods determine the cost of inventory by averaging the total cost of items over a defined period or quantity. These methods help maintain consistent pricing and are automatically updated with each new stock addition.
FTx Cloud POS allows average cost calculation in two ways:
  1. Weighted Average Cost
  2. Moving Average Cost

                         Figure 3.1.1

Info
Before learning each method in detail, here are some key points (applicable to both the Avg. Cost Methods):    
  1. Only applied adjustments and transfers are considered in the average cost calculation.
  2. Only positive adjustments, invoices, and Transfers From are considered.
  3. The average cost calculation is automatically calculated for the applied invoices.
  4. When the average cost is to be calculated for parent items, the updated average cost will automatically flow through to the child items, based on the parent-to-child quantity ratio.
  5. If the average cost is to be calculated for child items, the parent items' avg. cost won’t be affected. 

3.1. Weighted Average Cost Method

This method calculates the average cost of an item by looking at the total cost and quantity of all purchases (and other stock changes) over a chosen period (e.g., 1, 2, 3 months, or Go to Beginning).

Example:
  1. Invoice adds 2 units at $20 → total $40
  2. Stock adjustment adds 4 units at $21 → total $84
  3. Invoice adds 3 units at $21 → total $63
  4. Stock transfer adds 3 units at $22 → total $66
Notes
If you include all transactions, the average cost is calculated:
  1. Formula Used: Total Cost ÷ Total Quantity = $253 ÷ 12 = $21.08
    1. Weighted Average Cost = $21.08
Info
You can choose whether to include adjustments or transfers in the calculation using respective toggles. The system will calculate the weighted average cost accordingly.

3.1.1. Child Item Average Cost (Weighted Average Cost Method)

The items (Parent) are linked to other items (Child) through a defined ratio. For example, 1 Parent = 10 Child units (like 1 carton = 10 packs).
Whenever the parent item’s average cost changes, the system automatically recalculates the child item’s cost by:
  1. Converting the parents’ cost and quantity into child-equivalent values using the parent–child link.
  2. Adding those values to the child’s current QOH and cost.
  3. Recomputing the new child's average cost.
Example:
  1. Parent purchase → 10 units at $20 → Child equivalent = 100 units at $2.00 each.
  2. Next parent purchase → 20 units at $24 → Child equivalent = 200 units at $2.40 each.
Info
If the child has its adjustment or transfer, these can also be included/excluded using toggles.
This ensures the child’s cost always stays in sync with the parent’s cost.

3.2. Moving Average Cost Method

This method recalculates the average cost every time a new cost-related transaction happens. Unlike the weighted method, it doesn’t depend on a time period—it adjusts instantly using current QOH and transaction values.
Info
Formula: New Avg. Cost = (Current Stock Value + New Transaction Value) ÷ (Current QOH + New Qty)
Example:
  1. QOH = 0, Avg. Cost = $0 → Invoice adds 20 units at $20 → New Avg. = $20.00
  2. QOH = 5, Avg. Cost = $20 → Invoice adds 15 units at $22 → New Avg. = (5×20 + 15×22) ÷ 20 = $21.50
  3. QOH = 10, Avg. Cost = $21.50 → Adjustment adds 5 units at $21 → New Avg. = $21.33 (if toggle ON) or stays $21.50 (if toggle OFF)

3.2.1. Child Item Average Cost (Moving Average Cost Method)

Here, the logic is the same as weighted. Whenever the parent’s average cost updates, the child’s cost is immediately recalculated based on the parent–child ratio and current QOH.

Example:
  1. QOH (Parent) = 10 at $20 → Child inflow = 100 units at $2.00
  2. Child adjustment of 5 units at $2.20:
    1. If toggle is ON → recalculated Avg. = $2.07
    2. If toggle is OFF → QOH updated, Avg. remains $2.00
This keeps parent and child items aligned, whether tracked in bulk, packs, or single units.

Conclusion:
  1. Weighted Average = Based on a set period and all transactions.
  2. Moving Average = Updates instantly with each transaction (based on QOH).
  3. Child Items = Always recalculate from parent–child link + QOH, so costs remain accurate at all levels.

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