Inventory unit cost

The unit cost of a product represents the cost of each item of that product to you. The unit cost is the main information used to calculate the “unit contribution margin” of the product. This cost is a very important management index.

The best way to set the unit cost is to define it in the Initial Cost field when you add the product. You can also define the unit cost at any time by entering an inventory adjustment.

However, OnBalance changes the unit cost each time you add a purchase of a product. When you add a purchase, OnBalance recalculates the product’s current unit cost and updates this information in the Inventory screen. OnBalance uses the “MPM” method (Weighted Moving Average) to recalculate the current unit cost.

The following is an example of how OnBalance calculates the new unit cost of a product.

Example

  • Product A has a current cost equal to $4.50.
  • Product A has a current quantity equal to 50 units.
  • You add a purchase of 4 units of product A paying $5.00 each.
  • OnBalance calculates the unit cost as follows.
    • [(current quantity x current cost) + (bought quantity x unit cost)] / (current quantity + bought quantity)
    • [(50 x $ 4.50) + (4 x $ 5.00)] / (50 + 4)
    • (225 + 20) / 54
    • $4,537
  • The new current cost of product A will be $4.54.

If you do not want to accept the new calculated unit cost of a product, enter an inventory adjustment.

If you change, cancel, or delete a purchase, OnBalance will not recalculate the unit cost of the products for the purchase. You must manually change the unit cost through an inventory adjustment for each product in the purchase.