Glossary

# Average Cost per Unit

Tags: Glossary

The average cost of stock of any given item is based on having incurred different costs for each time a receipt was processed. It is usually calculated at the time of a new receipt by multiplying the old inventory quantity by the old average cost, then adding the received count and total cost, and finally dividing the new total cost by the new inventory quantity.

## What is Average Cost per Unit?

Average Cost per Unit

In the world of logistics, one important concept that businesses need to understand is the average cost per unit. This concept helps companies determine the average cost of their stock for any given item.

The average cost per unit is calculated by considering the different costs incurred each time a receipt is processed. To calculate this, we follow a simple formula. First, we multiply the old inventory quantity by the old average cost. Then, we add the received count and total cost. Finally, we divide the new total cost by the new inventory quantity. This calculation gives us the average cost per unit.

Why is this concept important? Well, knowing the average cost per unit helps businesses make informed decisions about pricing, profitability, and inventory management. By understanding the average cost per unit, companies can determine the minimum price at which they should sell their products to cover their costs and make a profit. It also helps them identify any discrepancies in their inventory management and control.

Let's consider an example to illustrate this concept. Imagine a company that sells widgets. They have an old inventory of 100 widgets with an average cost of $5 per unit. Now, they receive a new shipment of 50 widgets at a total cost of $300. To calculate the new average cost per unit, we multiply the old inventory quantity (100) by the old average cost ($5), which gives us a total cost of $500. Then, we add the received count (50) and total cost ($300), resulting in a new total cost of $800. Finally, we divide the new total cost ($800) by the new inventory quantity (150), giving us an average cost per unit of $5.33.

By understanding the average cost per unit, the company can now make informed decisions about pricing their widgets. They know that they need to sell each widget for at least $5.33 to cover their costs and make a profit. If they were to sell the widgets for less than this amount, they would be selling at a loss.

In conclusion, the average cost per unit is a crucial concept in logistics. It helps businesses determine the average cost of their stock for any given item, enabling them to make informed decisions about pricing, profitability, and inventory management. By calculating the average cost per unit, companies can ensure they cover their costs and maximize their profits.