Parts average cost explained

Your inventory is the goods held by your business that you intend to sell. When you make a sale, you need to determine what cost moves to the cost of sale account.

As the cost of the parts that makes up your inventory change, the software must accurately cost the parts to make sure that the cost, profit and inventory is correct after each sale has been made.

Eclipse will do this by using the average cost to value your inventory.

Example:

Let’s say you bought 5 brake lights on the 1st of Jan for $3 each and then another 5 brake lights for $5 each on the 1st of Feb. You then sell 8 of these parts.

But what cost do we use to determine the cost of those goods sold? $3? or $5?

If we used the last receipted cost price, the cost of parts sold would be $5 dollars per unit, so the total cost of goods for that sale would $40 (8 units x $5 cost per unit).

When this amount flows through to your reporting, your profit will be less than the reality because we are using the higher purchase price, when in reality some of your goods only cost you $3 dollars.

For this reason, Eclipse will use the weighted average equation.

The system calculates the average price by adding the receipted costs of each part available for sale, and divides by the quantity on hand.

The inventory cost flow would look as below:

As you can see, if you use the most recent cost per per unit, it has inflated the cost of the parts that were previously bought at $3.

This lowers our profit and gives us an inaccurate reading on the profit of the parts.

Using the average cost ensures that the profit of the parts gives each part you have an equal value.

This accurately gives us the profit as it spreads total cost evenly onto all of these parts. This will also accurately keep inventory in check.