does the purchase cost of the inventory you sell constantly change well you'll learn how to
deal with changing purchase costs in this video when we discuss the weighted average inventory
costing method if you have any questions about this topic you can leave them in the comment
section below and I'll do my best to help you and of course if you feel the video helped you
I hope you will click like and don't forget to subscribe to get updates on new videos that
come out all the time changing purchase costs can be a challenge when you're trying to track
your cost of goods sold to subtract it from your sales income to determine your profit purchase
cost of items sold as you know get recorded in the cost of goods sold account QuickBooks needs
to know the purchase cost of the items that were sold in order to be able to calculate the amount
of cost of goods sold for that particular sale if all purchase costs always stay the same then
QuickBooks will always know how much to put into the cost of goods sold account when you sell your
merchandise unfortunately if purchase costs change on new items purchased then you have
different purchase costs for the same item in inventory and that's the problem the problem is
if you have different costs for the same item the question is how does QuickBooks know which
costs to use when you sell an item and need to find the cost of goods sold for the items that
were in that sale for example let's imagine on April 1 you have three apples in your inventory
that you previously purchased for $10 each now let's imagine on April 2nd you purchased two
more apples each for $12 now here's where the interesting part comes in on April 3rd you sold
three of them which three did you sell they all look alike when they're sitting in the bunch and
then if you don't know which particular three apples you sold then what costs get assigned
to those apples for you to determine the cost of goods sold to subtract from your sales for that
particular sale that's the issue well QuickBooks desktop uses a special accounting method called
the weighted average method it's the average of all of the different costs that you paid for the
item with consideration to the quantity of the item after each step so let's first discuss what
a normal average is let's imagine you have one apple for ten dollars one Apple for twelve dollars
and one Apple for fourteen dollars if these were the three apples sitting in your inventory then
you know you paid a total of thirty six dollars for each of those three apples and you know that
the normal average cost for those three separate costs would be twelve dollars and then you could
use twelve dollars as the cost of goods sold for the apples that went out however you would not
normally use the normal average because that only considers the different costs without considering
the quantity purchased at each cost the weighted average method considers quantity in the average
so let's imagine we have one apple for $14 one Apple for $12 and we have three other apples
we previously paid $10 each now we have way more of the $10 apples so you can't just add 10 plus
12 plus 14 and divide by three because you're not considering that most of the apples were purchased
for $10 so you have to factor this into your average and we still have three different prices
but we have more of the apples that were purchased for $10 so you can't just add them up and divide
by three and use the number 12 as your cost of goods sold because the real average would have
to be closer to ten because you have way more at the $10 cost so here are the steps to finding the
weighted average so that you can assign a cost of goods sold to the items when you sell step
one find the total quantity well that's pretty easy especially if you're using a computer step
two and all the costs of all the items together to get the total cost and of course step three
divide by a use division divide cost by quantity and then you will have come up with a weighted
average for each individual Apple that you could then use as the cost of goods sold the very next
time you sell so if this were the situation and we sold three apples the cost of goods sold for
that sale would be three times the $11.20 notice it's a little bit closer to ten dollars than the
original twelve dollar regular average that we had because if we have more at the lower cost that
tends to pull down the weighted average now let's try a second example just to make sure you got it
before we go over to QuickBooks let's imagine an inventory right now we have five apples at
$13 each eight apples at $18 each and three apples at $16 each now we know that the weighted average
should be a little closer to 18 than anything else because you have eight apples at the 18
dollar purchase cost each so the total quantity is easy to calculate and the computer will give you
that but this is displayed a little differently so how would you get the total cost five apples
well what you would have to do is find the cost of each separate purchase and add it together
so for the five apples that you purchased at 13 dollars you would multiply and find those
five apples cost you sixty-five dollars to buy for the eight apples that you purchased
at eighteen dollars each those eight apples cost you a hundred and forty-four dollars and for the
three apples that you purchased that 16 dollars each they cost you forty eight dollars so these
apples together in total cost you two hundred and fifty-seven dollars and there's only 16 of them so
then when you divide you come up with a result that's 16 dollars and six cents and that is the
weighted cost of each unit the weighted average of each cost and it would be that number sixteen
dollars and six cents that you would multiply by the quantity whenever you sold to find the cost
of goods sold for that particular sale now let's see this in action in our QuickBooks file right
now in our inventory if you've been following along properly you should have two hundred and
seventy three apples physically available for sale and your report should show that you paid
ten dollars to purchase each of those two hundred and seventy three apples worth two thousand seven
hundred thirty altogether so what if we purchased a hundred more apples but we purchased them at $12
each what would happen well what would be the new cost per apple that QuickBooks would give
us right now we have two hundred and seventy three apples at ten dollars each making 27:34 the money
amount of our Apple inventory if we bought another hundred apples at twelve dollars each that means
we'd be paying one thousand two hundred more for those hundred additional apples and we know the
total quantity after that purchase would be three hundred and seventy three and we know the total
purchase cost of all apples after that purchase would be 3930 therefore the weighted average per
Apple would be ten dollars and fifty four cents so if we recorded this purchase QuickBooks would
then show us the new unit cost per Apple in the report that we just show showed a moment ago but
it would not say ten dollars it would say ten dollars and fifty four cents and that means
that any subsequent sale would have ten dollars and fifty four cents assigned to the cost of
the apples to calculate the cost of goods sold for that particular sale so let's record that purchase
let's imagine on May 2nd 2019 we paid Sam's farm twelve hundred dollars for ten apples Masumi 100
apples twelve dollars each well it's very simple banking write a check and we said that was May 2nd
of we're doing 2019 might as well do it right we bought it from Sam's farm and no we're not using
a past purchase order and yes we're still writing a check don't worry about those two pop-ups but do
not fill in the money amount go to the items choose apples and the quantity is a hundred
however we are changing the purchase cost from ten to twelve now it's gonna ask you should we update
with the new cost no because this might just be a fluke who knows or you might want to say yes if
you really feel that it's a permanent change but the point is we're buying a hundred apples for
twelve dollars each and we're paying Sam's farm $1200 now after we click Save and close we're
going to open the inventory valuation detail haha the new cost for Apple as of May 2nd is now ten
dollars and fifty four cents that means when we sell apples right now the amount of apples or the
quantity of apples that we sell will be multiplied by 1054 in order to calculate the cost of goods
sold so let's sell with the new cost on May the fourth we sold ten apples to candy and received
cash let's talk about this the sales income will still be five hundred because the sales price
each Apple is fifty and was selling ten of them so five hundred is coming in how much will be
the cost of goods so how much did how much does QuickBooks say that we paid for the apples that
for the ten apples that we just gave candy well QuickBooks is going to tell us that we pay ten
dollars and fifty four cents for each of the ten apples that we just gave candy and therefore if
we're selling ten of them that means a hundred and five dollars and forty cents is the amount
of cost of goods sold for that sale let's see if that's what QuickBooks does we click sale receipt
and change the date to may the 4th be with you now we're selling to candy and we're selling her
apples now the sales price certainly didn't change so if we're selling 10 apples we know that's 500
in income but after I click Save and close I can open the trial balance and I can see if I go to
sales and double click the sales number yes five hundred dollars in income for sales however if
I go to the cost of goods sold account and double click and go down to the most recent sale receipt
here on May the fourth you can see that the amount of cost of goods sold for that sale that we just
recorded is exactly the number we expected a hundred and five dollars and thirty six cents you