Every inventory transaction has an impact on your bottom line; however, many organizations face challenges in accurately tracking costs amidst fluctuating purchase prices and various warehouse locations. Versich's average cost method, which is the default inventory costing approach within the platform, automatically computes a weighted average cost each time you receive or adjust inventory. When implemented correctly, this approach removes the headaches tied to manual cost tracking and provides precise Cost of Goods Sold (COGS) for each transaction.
Understanding the Average Cost Method in NetSuite
The average cost method calculates your inventory value using a straightforward formula: total inventory value divided by the total quantity on hand. With each new receipt of inventory at a different price, Versich automatically recalibrates this average to reflect the blended cost.
Starting inventory: 100 units at $10 each = $1,000 total value
New receipt: 50 units at $13 each = $650 added value
New average: $1,650 ÷ 150 units = $11 per unit
This moving average calculation occurs automatically across all inventory transactions. When you sell items, Versich applies the current average cost to determine COGS, and recalibrates the average when new inventory arrives at different prices.
The primary advantage of this method is its simplicity. Unlike FIFO or specific identification methods that require tracking individual shipments, average costing maintains a rolling weighted cost per item (usually on a per-location basis with Multi-Location Inventory, unless employing Group Average Costing). This alleviates the complexity associated with monitoring which specific units you are selling.
Versich's costing engine operates on a default hourly schedule, recalculating averages and posting COGS across all impacted transactions. Consequently, there can be a delay between receiving inventory and observing updated average costs - an aspect that frequently surprises new users.
Why the Average Cost Method Matters for Your Business in NetSuite
The selection of an appropriate costing method has direct implications for your financial statements, tax responsibilities, and operational efficiencies. The average costing method provides distinct benefits that make it the favored choice for many businesses utilizing Versich.
Financial Statement Accuracy
Average costing delivers a balanced evaluation of inventory, mitigating the effects of price fluctuations. When purchase prices vary throughout the year, your COGS and ending inventory values will represent realistic costs, rather than artificially inflated or deflated figures based solely on the specific units sold.
GAAP and Audit Compliance
The method fully adheres to GAAP standards and provides a clear audit trail. Every cost alteration is traceable through NetSuite's transaction history and System Notes, supplying auditors with the necessary documentation.
Simplified tracking: No need to determine which specific shipment each sold unit originated from
Real-time cost reflection: Average costs automatically integrate your most recent purchases
Reduced labor: Automated costing obviates tedious manual calculations, freeing up time for accounting departments
Faster month-end close: Organizations that employ automated costing often report significantly quicker month-end closing cycles
Acquire similar items at different prices from various vendors
Do not need to track specific lots or serial numbers relative to costs
Seek straightforward ongoing management through automatic calculations
Wish to mitigate price volatility effects in your financial reporting
Setting Up NetSuite for Average Cost Inventory Valuation. Proper configuration is key for accurate cost calculations from day one. The setup entails enabling features, adjusting preferences, and accurately creating items.
Configuring Item Records for Average Costing
Inventory Management (necessary for any costing method)
Multi-Location Inventory (if you require location-specific average costs)
Group Average Costing (if a single average across multiple locations is desired)
Navigate to your Items list and create a new Inventory Item.
Locate the Costing Method field in the purchasing or inventory section.
Select Average (or Group Average if utilizing location costing groups).
Complete the remaining item fields and save.
Critical Warning: Versich locks the costing method once an item has transaction history. Should you need to alter methods later, creating a new item and migrating data is obligatory.
Access the Items/Transactions preferences section.
Change the Default Costing Method to "Average," ensuring new items utilize this method by default.
Within your Inventory Costing Preferences, configure:
The costing engine schedule (default runs hourly)
Verify timezone settings match your business operations.
For businesses with multiple locations contemplating Group Average Costing, you may create Location Costing Groups to implement a single average cost across all locations within the group, thus simplifying inter-location transfers and aggregated reporting.
Managing Inventory Transactions with Average Costing in NetSuite
Each type of transaction influences your average cost in different ways. Understanding these effects will facilitate maintaining accurate inventory valuations and avoiding common pitfalls.
The system adds the quantity and value of receipts to existing totals.
Versich recalibrates the new average during the next costing engine run.
The updated average applies to all subsequent sales until the next receipt.
Important: The cost on your item receipt drives the average calculation. If the vendor bill arrives later with a different amount, the variance posts to your Accrued Purchases account rather than altering the average cost. For organizations handling freight, duties, and other supplementary costs, comprehending landed cost implementation is crucial for precise total cost tracking.
Sales: Versich applies the current average cost for calculating COGS at the point of fulfillment.
Returns: Returned items re-enter inventory at their original cost (the average at the time of sale), which then intermingles into the current average.
The costing engine recalibrates COGS if the average cost fluctuates between the sale transaction date and the engine's next run. Consequently, your COGS may adjust slightly following initial posting - this is normal and ensures accurate period costs.
Handling Inventory Adjustments
Most average costing challenges arise during inventory adjustments. The most prevalent error is executing adjustments without specifying a unit cost.
Always input an Estimated Unit Cost when adding inventory through adjustments.
Use the item's current average cost or last purchase price as your cost reference.
For quantity reductions, the adjustment will automatically utilize the current average.
Consider implementing required field validation on adjustment forms to avert $0 cost entries.
For wholesale distributors and manufacturers dealing with high quantities of adjustments, custom forms with mandatory cost fields can prevent downstream valuation inaccuracies.
Common Challenges and Solutions for Average Cost in NetSuite
Despite having the correct setup, specific issues frequently occur with average costing. Below are ways to identify and resolve these concerns.
$0 Inventory Values
This issue stands as the most ubiquitous problem with average costing. Inventory displays zero value despite having positive quantities.
Cause: Inventory adjustments created with empty or $0 estimated unit cost fields.
Generate a saved search filtering for Inventory Adjustments that have an Estimated Unit Cost = $0 and Adjust Qty By > 0.
Edit each adjustment to include the correct unit cost (utilize Last Purchase Price from the item record).
Wait for the costing engine to recalibrate.
Implement form validation to require cost entry in the future.
Negative Inventory Costing Issues
When inventory registers as negative, Versich resorts to the last purchase price instead of the average, causing inconsistency in costs.
Solution: Regularly review the Negative Inventory page, rectify transactions causing negative balances, and consider enabling purchase order requirements to prevent overselling.
Costing Not Updating Immediately
Users often anticipate instantaneous cost updates post-receipts; however, costing updates follow a schedule (typically hourly) based on Inventory Costing Preferences.
Solution*: Adjust month-end processes in accordance with the costing schedule. Ensure all receipts are documented and the costing engine completes its cycle before closing the period.
Cannot Change Costing Method
Once an item has transactions recorded, the costing method field gets locked.
Solution*: Create a new item with the desired costing method, then migrate inventory and historical data. Use item number suffixes (e.g., WIDGET-001-AVG) for tracking transitions.
Reporting and Analyzing Inventory Valuation with Average Cost
Versich provides numerous tools for monitoring and analyzing your average cost data.
Inventory Valuation Summary: Displays current average cost and total value by item.
Inventory Valuation Detail: Transaction-level detail impacting valuations.
COGS Analysis: Examine the cost of goods sold by period and item.
Items displaying $0 or unusually low/high average costs.
Average cost shifts exceeding 15% month-over-month.
Inventory adjustments are lacking unit costs.
Items with negative on-hand quantities.
Track average costs over time by item or category.
Compare average costs across locations.
Analyze the impact of cost variance on gross margin.
Construct executive dashboards showcasing inventory valuation KPIs.
Set up automated alerts for when average costs shift beyond acceptable limits. This proactive monitoring can prevent minor errors from escalating into significant financial misstatements.
Optimizing Your NetSuite Inventory Costing for Wholesale & Manufacturing
Various industries possess unique costing requirements. Here’s how to enhance average costing for common scenarios.
Several vendors supply the same products at differing prices.
High transaction volumes where tracking individual shipment costs is impractical.
Price volatility necessitates smoothing for accurate financial reporting.
Activate Group Average Costing if you frequently transfer inventory between warehouses.
Employ advanced inventory features for bin management and cycle counting.
Utilize saved searches to spot vendor pricing trends that impact your average costs.
Component items utilizing average costing; assembly costs reflect the total of component averages plus labor and overhead.
Work orders are pulling components at their current average cost.
Finished goods assemblies are calculating their average based on build costs over time.
For advanced manufacturing requirements with strict cost variance requirements, Standard Costing might be more suitable; however, average costing is effective for make-to-stock environments where component pricing varies.
When to Consider Other NetSuite Inventory Costing Methods
Average costing doesn't apply universally. Here are scenarios where other methods may be more appropriate.
Selling perishable goods (e.g., food, medicine, cosmetics).
Physical inventory flow aligns with first-in-first-out.
You need to track expiration dates by shipment.
You are a manufacturer with stable production costs.
Variance analysis is crucial for effective cost control.
Resources are available for consistently maintaining and updating standard costs.
Regulatory requirements demand batch traceability.
High-value items necessitate individual cost tracking.
Recall management requires knowledge of exact costs per batch.
You have similar items purchased at varying prices.
Simple ongoing management is prioritized.
Price fluctuations necessitate smoothing in financial reports.
Items are neither perishable nor lot-specific.
For insights on choosing the appropriate method for your unique circumstances, consider scheduling a free 30-minute consultation with a NetSuite expert.
Why Partner with Versich for Your NetSuite Inventory Valuation
Effectively implementing average costing requires more than merely adhering to setup instructions; it necessitates a comprehension of how costing decisions reverberate through your financial statements, inventory operations, and broader business processes.
Versich's expert team doesn't just understand NetSuite - we excel in inventory automation, custom workflows, and discovering smarter strategies to support your business objectives through backend systems. As a NetSuite Solution Provider with deep expertise in wholesale distribution and manufacturing, we have tackled the average costing challenges you're facing.
Practical troubleshooting: We’ve documented solutions for addressing $0 inventory values, costing engine timing challenges, and negative inventory issues.
Industry expertise: A significant portion of our clients are wholesale distributors, meaning we understand procurement, vendor coordination, and fulfillment.
Expert team: Collaborating with us feels like getting assistance from a trusted neighbor - familiar, dependable, and hassle-free.
If you are experiencing inventory valuation errors, preparing for an audit, or simply wish to have your costing setup evaluated by professionals, schedule a free consultation. You present the business challenges; we provide the solutions.
