Understanding Average Cost
Katana uses the Average Cost method for inventory costing.
Katana does not support any other inventory costing methods like First-in-first-out (FIFO) or Last-in-first-out (LIFO).
The Average Cost is Katana is the current average cost of the item "In stock". At any point in time, it is the item's "Value of stock" divided by the quantity "In stock". It is a perpetual inventory system whereby, after each acquisition, the average unit cost is recomputed by adding the cost of acquired units to the cost of units in inventory and dividing by the new total number of units.
1. You purchase 10 pcs of material X for 10 USD per unit. Your total Value of Stock is 100 USD and Average Cost is 10 USD per unit.
2. You then purchase another 5 pcs of material X for 13 USD per unit. Your total Value of Stock is now 165 USD and Average Cost is 165 / 15 = 11 USD per unit.
3. If you then use 8 pcs of material X for manufacturing product Y, the Average Cost will not change for material x. In the Product Recipe for product Y, the cost of material X per unit will be 11 USD.