**Average costing** method is a way to calculate the cost of items by taking the average price of all the items in a group. Average costing method also known as **Weighted Average.**

##### Imagine you have a bunch of identical products with different purchase prices. Instead of keeping track of each item's specific cost, you add up the total cost of all the items and then divide it by the total number of items. This gives you an average cost per item.

**Business Scenario:**

##### Imagine a clothing store that sells a particular style of t-shirts. These t-shirts may be purchased from suppliers at different prices throughout the year due to factors like seasonality, promotions, or changes in the supplier's pricing.

##### If the business opts to implement the average costing method, what GL entries and value entries would be generated to account for this?

**Configuration related to Average Costing Method**

##### In the Inventory Setup please make sure that you selected **Average Cost Calc. Type** and **Average Cost Period**. These are two mandatory fields to use average costing method.

`You can only use one average cost period and one average cost calculation type in a fiscal year.`

##### The **Accounting Periods** page shows which average cost period, and which average cost calculation type is in effect during that period, for each accounting period

`Add these two columns by using Personalize option.`

**Purchase Scenario**

##### Let's input the purchase invoice based on the table below and examine the corresponding GL entries, Item ledger entries, and Value entries.

##### Below are the G/L entries

##### Below are the Item Ledger Entries and Value entries

##### The unit cost is calculated using the Average formula, just like in the FIFO costing method.

`Unit Cost = Total Purchase Amount ÷ Total Available Inventory`

**Sales Scenario: Post sales invoice on 2-Sep, with quantity 100pcs**

##### Below are the G/L Entries

##### Below are the Item Ledger Entries and Value entries

##### Below is the Calculation of COGS Amount

`COGS Unit Cost = Total Purchase Amount ÷ Total Available Inventory`

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