Average cost

For an inventory item, average cost is the total cost of the items currently in stock divided by the number of items in stock. QuickBooks uses average cost—and not another method such as LIFO or FIFO—to determine the value of your inventory.

QuickBooks recalculates the average cost of an item every time you record the purchase of more units of the item. It adds the cost of the new items to the cost of the old stock and then divides by the total number of new and old items.

Example

You originally bought 100 T-shirts at $5.00 each. When you have 10 shirts left in stock, you order 100 more shirts, but the price has gone up to $6.00 each. Here's how QuickBooks calculates the average cost: