Adjusting Average Cost
Big Business calculates Item Costs on an Average Cost basis. This means that if you purchase an Item for $1.00 and purchase a second of the same Item for $2.00, your Total Cost for this Item will be $3.00. Average Cost is then calculated based on the Total Cost of the Item, divided by the Quantity on Hand. In this case, the Average Cost would be $1.50.
You may have problems with erroneous Item Average Costs if you sell into negative quantities. Since an Invoice will reduce you Inventory Asset Account and increase your Cost of Goods Sold Account, if you do not have the Item on hand, an incorrect value may be posted to these accounts, and to your Item Average Cost and Total Cost. For example, if you had zero widgets on hand, and last time you sold the Item, your Average Cost was $1.00, Big Business would use this last Average Cost. If you were to sell 10 widgets, you would now have -10 widgets on hand, at a Total Cost of -$10.00, and an Average Cost of $1.00. If you then purchased 11 widgets at $2.00 each, you would add $22.00 to the Total Cost, bringing the Total Cost up to $12.00. Because you now have 1 widget on hand, your new Average Cost will be $12.00.
If you are using Big Business 2.0.6 or above, when you enter your Bill for 11 widgets, Big Business will alert you that an Item Adjustment needs to be made in order to bring your Item Average Cost, Inventory Asset Account, and Cost of Goods Sold Account into line. This adjustment will occur if you click OK and continue to Save the Bill. Due to the nature of the Adjustments, the Bill will be permanently locked and cannot be modified or deleted at a later date.
Additionally, if you are using Big Business 2.0.7, you may encounter a bug which prevents your Item Total Cost and Average Cost from updating at the time that you sell into a negative Quantity on Hand. This will then cause the automatic adjustments that are made when saving a Bill for this Item to be incorrect.
Given the accounting ramifications of selling into negative quantities, and the potential problem created by the aforementioned bug, we recommend that you do not sell into negative quantities.
This Big Help document will describe in detail the steps involved in making Item Adjustments to correct for the incorrect Item Average and and Total Costs. If you continue to sell into negative quantities after making these adjustments, you are likely to continue to have problems with your Average and Total Cost values. (3052)
Begin by printing an Item Status Report, which will give you a list of all of your Inventory Items, along with Total Costs and Average Costs. Use this report to determine which Items have incorrect values and should be adjusted.
Before proceeding with Adjustments, verify the accuracy of the values you wish to adjust. Open the Item Card and recalculate the values of, in order, the Quantity on Hand, Total Cost, and Average Cost. To recalculate, hold down Shift-Option-Command (MAC) or Shift-Control-Alt (WIN) and click on the number to recalculate. At the “Big Business will now verify this value” prompt click Continue. If Big Business reports a difference, opt to change to the correct value. First recalculate QOH, then click the History Tab and recalculate Total Cost, then Average Cost. Now you have correct values with which to perform Item Adjustments. Be sure to close the Item Card so that these values are update and available for the Item Adjustment you will be performing.
Warning: Do not perform the recalculation if you have cleared transactions in previous periods. The calculated totals will not include cleared information.
Open the Item Adjustment tool and begin by setting the Date and Category correctly. The Date should be, if possible, in the month during which the error occurred, the objective being to post the Adjustments in the same reporting period as the error. The Category must be your Cost of Goods Sold Category for the Item. You will find the Cost of Goods Sold Category on the History Tab of the Item Card (most companies have only one COGS account).
Enter the Item on the first line of the Adjustment. If this is a Built Item, Big Business will ask if you want to Build or Adjust the Item. Select “Adjust.” Enter 0 (zero) in the New Qty column. Leave the “incorrect” Average Cost that is automatically entered in the Avg. Cost column. This line effectively zeroes out your Inventory offsetting to the Cost of Goods Account.
Add a second line to the Item Adjustment for the same Item. Enter the correct QOH into the Adjust column. The New Qty will be overstated since the first line of the Item Adjustment reducing QOH to zero has not yet posted. Ignore the New Qty column. Enter the correct Average Cost in the Avg. Cost column.
Save the Item Adjustment by clicking the OK button. If you open the Item Card, you will find the correct Quantity on Hand, Average Cost, and Total Cost. The Inventory Asset Account and Cost of Goods Sold Account have now been corrected for the net of errors caused by this Item. When all erroneous Items have been corrected, profitability on some Invoices will remain incorrect, but in the aggregate your Inventory Asset Account(s) and Cost of Goods Asset Account(s) will be corrected.
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