What is the moving average costing method?
Moving average costing gives every unit of a product one shared cost that changes as you buy more. Each time new stock arrives, the system adds the purchase cost to your existing inventory value and divides by the total units on hand. That single figure then sets your cost of goods sold (COGS) and the value of what is left.
The method exists because purchase prices rarely hold steady between orders. Rather than tracking a separate cost for each batch, it combines every cost into one current number that is easy to apply. That keeps the result moderate: it typically falls between FIFO and LIFO, the first in, first out and last in, first out methods.
Key characteristics
- Recalculated on receipt: The average changes only when you buy and receive new units, using total inventory cost divided by total units.
- No cost layers: Every unit shares one current average, so you never track separate purchase batches the way first in, first out (FIFO) and last in, first out (LIFO) require.
- Perpetual system only: It relies on live records, so it does not fit a periodic count taken once when the period closes.
- Sets COGS and ending inventory: The same average values both the goods you sell and the stock left over, which matters when calculating ending inventory.
- Resets at zero: In Fishbowl, the average refreshes as stock is received, and it drops to the cost of the next units added if quantity reaches zero.
Example
Say a specialty coffee roaster starts with 100 pounds of green coffee beans that cost $4.00 per pound, a total value of $400. The roaster then buys 100 more pounds at $5.00 per pound, adding $500.
To find the new moving average, add the two values and divide by total units: ($400 + $500) ÷ 200 pounds = $4.50 per pound. Every pound in stock is now worth $4.50, and that figure prices the next sale.
Clean records are what make this number reliable. Fidalgo Coffee Roasters credits Fishbowl with getting its “costing down to the penny,” since the platform maintains the average automatically as new stock arrives.
Related terms
- Weighted average cost method: the same averaging idea applied once per period in a periodic system.
- Inventory valuation methods: the full set of approaches, including FIFO, LIFO, and specific identification.
- Inventory costing methods: how manufacturers assign costs to the products they make.
FAQ
Is the moving average costing method the same as weighted average cost? They use the same math. Moving average is the perpetual-system version that updates after each purchase, while weighted average cost is usually figured once at period end.
Can you use it with a periodic inventory system? No. The running average needs real-time updates, so it works only in a perpetual system that records each receipt as it happens.
Does the average change when you sell an item? No. The average shifts only when you receive new units at a different cost, so a sale draws on the current figure without resetting it.