What is moving average cost?
Moving average cost is an inventory valuation method that recalculates the average cost of an item every time more of it is bought. Each unit in stock is then carried at that average, and each sale is costed at the average in force when it happens.
Formula
New average cost = (units in stock × current average cost + units purchased × purchase cost) ÷ total units
Worked example
You hold 200 units at an average cost of 10.00. Buying 100 more at 13.00 brings the stock to 300 units worth 3,300.00, so the new average cost is 11.00 per unit.
How to use the moving average cost calculator
- Enter your figures: units in stock, current average cost per unit, units purchased and purchase cost per unit.
- Read the result. It updates as you type, so there is no button to press.
- Try other numbers to compare scenarios. Reset brings back the example values.
Getting it right
- Sales do not change the average; only purchases at a different price do.
- Use the landed cost of the purchase, including freight and duties, for the new units.
- When prices are rising, moving average gives a cost of goods sold between FIFO, which is lower, and LIFO, which is higher.
Frequently asked questions
How do you calculate moving average cost?
Add the value of existing stock to the cost of the new purchase, then divide by the total number of units now held.
How is moving average different from weighted average cost?
Weighted average is worked out once for a whole period. Moving average is the same calculation repeated after every purchase, which suits perpetual inventory systems.
When should I use the moving average method?
It suits businesses with many identical items bought at changing prices, where tracking the cost of each individual batch would be impractical.