TL;DR

MC Average Cost is a weighted average cost where product bought recently has a greater impact on the average cost than product bought a long time ago.

The MC Average Cost average is calculated every time you close a Purchase Order for all the items that go into inventory.

We give a short description to help understand the MC definition of 'Average Cost'. For some people the concepts behind different valuation methods and trying to decide yours is fascinating and can consume many hours or weeks of internet (or old college text book) research. For most CMMS purposes, there is little value in getting too complicated. In any event the rest of this article explains how the MC ones works so you can decide how you want to proceed.

Details

High level

Different views on "Average" cost:

There are a few different ways people, cost and tax accounting, managerial and financial accounting look at and calculate 'Average Cost'.

LIFO: You can use LIFO (Last in First out, like a pile of gravel where the last in is scooped up more or less first),
FIFO (First in First out) such as when a store stocks from behind the shelves putting milk in at the back while customers grab from the front. This can also be called a 'moving average."

In both these cases you are trying to estimate "average cost of items in stock". You could look at the costs of the individual items, add them all up, then divide by the number of times. To do this on a system that may have some inventory going back years with stock levels set high enough that you never run out, this could take a very long time for the computer to calculate every time you buy more or take away.

The concept of 'materiality' in accounting often comes in to play with inventory valuation>. Consider the LIFO example. Do you care that when 3 meters of gravel is removed, 3 Gallons of rocks from an older stock were removed while 6 liters of of the newest priced gravel was left, so you didn't technically remove the last in/first out, you have some second last in/first out. But if you've chosen to use LIFO, that goes along with a decision that it is 'not material' that you don't always exactly remove the newest first, it 'isn't material'.

All time. You keep a running total of all the purchases ever, their quantity and their costs. You total the total cost and divide by the total quantity. This fits the words best, but is a pretty lousy way to count the inventory.
Period of time. You calculated the average price over a period of time such as 'last 3 months' or 'last year', and ignore the fact that for some products old stock sticks around for more than a year with no ill effect (think nails), and for other products you might have sold out a week ago so all the current stock is the latest price. Again, if you decide to follow this, the concept of 'materiality' applies.

MC's Method:

So MC uses a method of Average Cost that is a weighted average cost, where product more recently has a bigger effect on the 'average price' than older stock.

Strengths and Weaknesses:

It helps keep prices more or less current, while ignoring temporary price spikes (Think price of oil during a Middle East war) or huge 'clear-out sale' prices. But it only does this if your inventory levels are kept high enough. So:

Short term price spikes can unduly affect the price upward for an extended period of time, even after all that product has been used.
Short term price 'sales' can unduly affect the price downward for an extended period of time, even when that product has been used.

It is only an average of items in stock if the quantity dropped to zero and then no products have been used since that time, only items have been bought. Otherwise it is a 'mathematical' average based on some rules, not based on the actual inventory, but obviously heavily weighted by the inventory.

The more recently the quantity was reduced to zero, the more accurate the number is for average price of items currently in stock.

If not dropping all the way to zero, the closer it got to zero, the more accurate it is.

It can have a long tail of ancient costs depending especially on when the lowest recent stock levels were. (The lower and more recent, the less effect from ancient costs, but unless it hits zero, it is less effect, not 'no' effect.

To be clear:

This is NOT the average cost 'forever'.

This is NOT the average cost of the stock currently in inventory. Though it is weighted to be close to this.

This is NOT the average cost over any period of time.

But it IS a cost that 'feels' like average from a PRACTICAL perspective as long as there have been no very high or low price events with a low stock level.

But I don't like the MC method

You have several choices at that point. The first obvious one is: Don't use it! Pick one of the other options. But remember: This is a CMMS system (It's also an EAM, but things like average cost have no applicability for the EAM side of things.)

But if you say "But we want the average cost formula that is used in our accounting system" you have a couple options:

1. Use our MCe API or MCe DataHub to import the current average cost from your accounting system periodically, perhaps weekly.

2. Suggest a 'Customer Sponsored Feature' where we look at an additional option for calculating the average.

Technical details for those that need to know

C# = The total number of items currently in stock

A$ = The average price currently saved

N# = the number of new items just purchased

N$ = the price per for the new items just purchased

New Average cost = ((C# * A$) + (N# * NS) ) / (C# + N#)