Overview of Average Costing

Under average cost systems, the unit cost of an item is the average
value of all receipts of that item to inventory, on a per unit basis. Each
receipt of material to inventory updates the unit cost of the item
received. Issues from inventory use the current average cost as the unit
cost.
By using Oracle Cost Management’s average costing method, you can
perpetually value inventory at an average cost, weighted by quantity
(inventory cost = average unit cost * quantity).
For purchased items, this is a weighted average of the actual
procurement cost of an item. For manufactured items, this is a
weighted average of the cost of all resources and materials consumed.
Note: Weighted average costing cannot be applied to
repetitively manufactured items. Therefore, you cannot define
repetitive schedules in an organization that is defined as a
manufacturing average cost organization.
This same average cost is used to value transactions. You can reconcile
inventory and work in process balances to your accounting entries.
Note: Under average costing, you cannot share costs; average
costs are maintained separately in each inventory organization.
Average costing enables you to:
• approximate actual material costs
• value inventory and transact at average cost
• maintain average costs
• automatically interface with your general ledger
• reconcile inventory balances with general ledger
• analyze profit margins using an actual cost method
Inventory allows negative on–hand quantity balances without
adversely affecting average costs.