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Average costing is used primarily for distribution and other industries where the product cost fluctuates rapidly, or when dictated by regulation and other industry conventions. Average costing allows you to:

• value inventory at a moving average cost

• track inventory and manufacturing costs without the requirement of having predefined standards

• determine profit margin based on an "actual" cost method

• measure the organization's performance against historical costs

• include all direct costs of manufacturing an item in that item's inventory cost

• value inventory at a predetermined cost

• determine profit margin based on projected costs

• record variances against expected costs

• update standard costs from any cost type

• evaluate production costs relative to standard costs

• measure the organization's performance based on predefined product costs

• evaluate product costs to assist management decisions

Average Costing	Standard Costing
Material with Inventory; all cost elements with Bills of Material	Material and material overhead with Inventory; all cost elements with Bills of Material
Item costs held by cost element	Item costs held by cost sub-element
Unlimited sub-elements	Unlimited sub-elements
No shared costs; average cost is maintained separately in each organization	Can share costs across organizations when not using Work in Process
Maintains the average unit cost with each transaction	Moving average cost is not maintained
Separate valuation accounts for each cost element	Separate valuation accounts for each subinventory and cost element
No variances for Work in Process Transactions	Variances for Work in Process transactions
Table 1 - 2. Comparison of Standard and Average Costing

Under average costing, you cannot share costs. Average costs are maintained separately in each organization.

Under standard costing if you use Inventory without Work in Process, you can define your item costs in the organization that controls your costs and share those costs across organizations. If you share standard costs across multiple organizations, all reports, inquiries, and processes use those costs. You are not required to enter duplicate costs. See: Organization Parameters Window and Defining Costing Information.

Note: The organization that controls your costs can be a manufacturing organization that uses Work in Process or Bills of Material.

Organizations that share costs with the organization that controls your costs cannot use Bills of Material.

Valuation Accounts and Cost Elements with Average Costing

Note: Cost Management enforces the same account number for organization level material and intransit accounts. Otherwise the balances of inventory valuation reports do not equal the sum of accounting transactions.

Changing from Standard to Average Costing

See Also

Inventory Standard Cost Transactions

Work in Process Standard Cost Transactions

Overview of Average Costing: page

Inventory Average Cost Transactions

Work in Process Average Cost Transactions

Standard Cost Valuation

Average Cost Valuation

Inventory Standard Cost Variances

Work in Process Standard Cost Variances

Average Cost Variances

Inventory and Manufacturing Costing Compared