The cost of inventory items is calculated by the
average cost method.
The average cost of an inventory part or inventory assembly item at a
particular point in time is determined by the total asset value of the
inventory part or inventory assembly divided by the quantity on hand. The asset
value of an assembly item is set by either its purchase price or its build
costs. When an assembly item is purchased into inventory, its asset value is
simply the purchase price. For a built assembly item, the asset value is
determined by the sum of the average costs of all its component parts.
Inventory included in pending
assembly builds is not accounted for when average cost is calculated. If you
choose to edit a build transaction that causes many assembly builds to change
to pending, therefore removing them from the average cost calculation, the
average cost of your inventory as reported by QuickBooks will change.
How do I find out which builds are
When assemblies are nested (one or more assemblies are components of other
assemblies) and you change a transaction that causes at least one build
transaction in the nested hierarchy to change to pending, build transactions
for related assemblies can change to pending as well.
How does transaction modification affect
If you use assemblies in your inventory, consider the following issues
before deciding to change a build transaction:
How much of your inventory is accounted for in assembly items?
How great a change in value does your transaction change represent? If the
resulting value change is negligible, the transaction's effect on the
overall average cost of your inventory will also be negligible.
If you make a change to a transaction, how many assembly items is it likely
Are assembly items nested for many levels? Could changing one transaction
force a significant number of assemblies to change to pending, preventing them
from being included in the average cost calculation?
Answering these questions can help you determine whether or not the average
cost of your inventory is accurately reported by QuickBooks.
When calculating average cost, QuickBooks accounts for any change in the
purchase price of your inventory. At build time, QuickBooks calculates average
cost of assembly items by:
Calculating the average cost for each
Multiplying the quantity of each component item specified in the assembly
definition with the quantity of the assembly item.
Multiplying the total quantity of each component with average cost value for
Dividing the sum of all component costs by the number of assembly units.
These calculations are summarized in the following table:
July 25, 2002
August 5, 2002
August 8, 2002
(Inventory part 1)
(Inventory part 2)
To calculate an accurate average cost for all assembly items in inventory,
QuickBooks also accounts for any previously built or purchased assembly items
QuickBooks adds the average cost of the assembly items just built to any
assemblies of the same type already existing in inventory.
Then QuickBooks divides this final sum by the current quantity on hand.
From this example, you can see that if you change historical transactions
(for example, change the purchase cost of Inventory part 2 (Component 2)),
QuickBooks recalculates average cost for all transactions related to this
assembly that follow the edited transaction. If the change you make is
substantial, the effect on average cost could be significant.