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From Adrian Crum <adri...@hlmksw.com>
Subject Re: Accounting Average Cost Algorithm
Date Thu, 10 Jan 2008 17:28:17 GMT
I've found it's best to ask an accountant these types of questions. In this example, an accountant

might expect average cost to be calculated a certain way, and not worry so much about "penny
accuracy."

-Adrian

Daniel Kunkel wrote:

> Hi
> 
> It's so wonderful to see an integrated accounting system for OFBiz. 
> 
> I've done some thinking about the algorithm used to calculate the
> average cost of an inventory item, and thought I'd share it again.
> 
> Rather than trying to store an "average cost" for an item, I believe we
> would be much better off storing the "total investment" for each item.
> 
> Most of the time, it won't make any difference, however I have seen that
> directly storing the average cost leads to all sorts of floating point
> resolution and residual adjustment issues, and complications when
> purchasing inventory at a varying price. Most notably that the total
> investments purchasing an item sometimes won't exactly equal the total
> cost of goods expensed after it is all expended.
> 
>>>From http://lists.ofbiz.org/pipermail/dev/2006-March/010207.html:
> 
> For example, if you bought a million pieces for $3,889,107,143, and sold
> them out of inventory one at a time for $3.89 without tracking/updating
> the residual average cost..  eventually you'd have to account for
> difference of more than $800,000!
> 
> The solution:
> 
> Keep a running "total investment" for each item. At 
> the point that you utilize an item, calculate and subtract 
> the cost of those items rounded to a penny for example. Other 
> currencies will round to the degree necessary for their currency.
> 
> The effect of doing this will be that the cost of goods will 
> oscillate up and down, in the above example between 3.88, and 3.89
> in such a way that when you've sold your millionth item, the 
> residual investment remaining is exactly 0.
> 
> Thanks
> 
> Daniel
> 
> 
> 
> 
> 


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