How Does The Option of Weighted Average Cost Work?

How Does The Option of Weighted Average Cost Work?

You can activate the weighted average cost option on the General page under Store setup.

If it is unticked (unchecked), the option is deactivated and your store is currently calculating cost based on the latest cost set on the product's profile page, as shown in the image below. If it is ticked (checked), your store is calculating the average cost based on the weighted average cost matrix.




Please note: we recommend not to change this setting once it's set up. It may mess up the data in the sales report if you change it back and forth.

How is the weighted average cost calculated?

The weighted average cost will be calculated based on the initial inventory, the cost of the initial inventory, the purchased quantity in the purchase order and the purchase cost in it. Here's an example of how it's calculated for Product A.

Transaction
Date
Quantity Changed
Cost Entered
Purchase Cost In Sales Report
Total Cost
Initial inventory
1 January
+8
$100

$800
Sale
1 January
-1

$100
$700
Sale
2 January
-1

$100
$600
Purchase
3 January
+10
$60

$1200
Sale
3 January
-1

$75
$1125

  1. Product A is created on the 1st of January, with the initial stock as 8, and the cost as $100.
  2. When you sell one Product A on the 1st of January, the purchase cost in the sales report will be recorded as $100.
  3. Then, you change the cost of Product A in the product details page to $80, and sell another Product A on the 2nd of January. The purchase cost in the sales report will remain unchanged. It will be recorded as $100, rather than $80.
  4. You process a purchase order of Product A, buying 10 Product As at $60, and receive it on the 3rd of January. The purchase cost will be updated. When you sell a Product A, the purchase cost will be recorded as $75 = ($100 * 6 + $60 * 10) / (6 + 10).

Will this impact the way I use Hike if the weighted average cost is activated?

To ensure that the feature works properly, you may get a warning when using the following features.
  1. Editing cost in the product's profile page manually, in bulk via importing, or by 3rd-party integrations.
  2. Adjusting inventory in the product's profile page manually, in bulk via importing, or by 3rd-party integrations. 
As you may understand, the calculation of the weighted average cost depends on the inventory and the cost value. It will work effectively only if cost and quantities are streamlined with purchase orders. Manually updating cost or quantity may lead to miscalculation of the weighted average cost.
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