If you are working with QuickBooks inventory items (or plan to work with inventory items in the future), it is important to understand how QuickBooks tracks the cost for them.
The Windows versions of QuickBooks use what is known as the "average cost" for calculating inventory costs. The average cost is just like it sounds - QuickBooks continually calculates the average of the costs involved when inventory is purchased.
A basic example - if you purchase 10 widgets at $1, and another 10 widgets at $2, QuickBooks will calculate your average cost as $1.50 each.
This value is displayed at the bottom of the inventory item screen as shown below:
You may also hear other inventory costing terminology kicked around by us "accountant-types". Terms such as FIFO (first in, first out), LIFO (last in, first out), Specific Cost, Landed Cost and other mind-numbing words. All of these other methods of costing don't matter to QuickBooks - it doesn't understand them. QuickBooks lives in the world of average cost.
CPAs everywhere will often debate the pros and cons of each of these inventory costing strategies. In some businesses and/or certain industries, the use of average cost isn't the best option and alternative software must be explored (more on that in a moment).
However, for a majority of small businesses, the use of average cost to value the inventory is perfectly acceptable and shouldn't entail any filibusters about why to use it. Just use it. The time spent arguing about the costing method could be far better spent actually tracking the inventory properly in many cases!
WHAT IF SOMETHING OTHER THAN AVERAGE COST IS NEEDED?
Good news if that is the case...
There are several really good advanced inventory software add-ons that "bolt into" QuickBooks and provide costing such as FIFO, etc. These software packages also provide inventory functionality that may not be found within QuickBooks - such as lot tracking, serial number tracking, and more.
The benefit of going the "add-on" approach is this - your business can continue using QuickBooks for your core accounting and financial reporting needs. No need to throw that out or lose your investment. You just gain the benefit of the features and functionality found in the inventory software add-on.
NEED GUIDANCE ON INVENTORY?
I spent over ten years being the point person responsible for over $4 million of inventory when serving as a CFO, so I've worked through a lot of issues you are probably contemplating.
Let me put that knowledge to work to help you make the right decisions when it comes to your inventory and QuickBooks. Click the "Contact Scott" button below so we can connect and talk further.
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