Katana uses the Moving Average Cost method for inventory costing. Other inventory costing methods such as First-in-first-out (FIFO) or Last-in-first-out (LIFO) are not supported.
The Moving Average Cost refers to the current average cost of an item "In stock". The number is calculated from the item's "Value of stock" divided by the quantity "In stock". It is a perpetual inventory system where, 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.
In Katana, it's easiest to look at any variant's inventory intel to understand how this works:
You purchase 10pcs of material X for $10 per unit. The total Value of Stock is $100, and the Average Cost is $10 per unit.
Total stock value: 10 pcs x $10 = $100
Unit cost: $100 / 10 pcs = $10
You then purchase another 5pcs of material X for $13 per unit. The total Value of Stock is now $165 and the Average Cost is 165 / 15 = $11 per unit.
Purchased stock value: 5pcs x $13 = $65
Total stock value: $100 + $65 = $165
Total stock: 10 pcs + 5 pcs = 15 pcs
Unit cost: $165 / 15 pcs = $11
Then, if you use 8 pcs of material X to manufacture 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.
Used stock value: 8 pcs x $11 = $88
Total stock value: $165 - $88 = $77
Total stock: 15 pcs - 8 pcs = 7 pcs
Unit cost: $77 / 7 pcs = 11 pcs
A variant's moving average cost is calculated based on location. This means that the same material or product can have a different moving average cost for each location. These differences come from various reasons, such as differing purchase prices for materials, varying manufacturing costs, etc. Keeping the moving average cost calculation separate means that each location in Katana can maintain independent accounting numbers.
Moving average cost and past document changes
Document changes that affect stock can only be done during open inventory periods. Read more about Inventory period closing. Any change will trigger a recalculation of stock movements for the variant and any variant connected to it.
In situations that require changing the moving average cost of a variant, it's best to make two stock adjustments. The first stock adjustment is to adjust the stock balance to zero, meaning the stock with an existing moving average cost is erased from Katana. Afterward, create a positive stock adjustment to bring the quantity back to stock with the desired unit cost on the stock adjustment document. You can also achieve the same result by updating stock levels and stock values import.
What affects moving average cost?
Moving average cost is affected by every transaction related to the input prices of products - acquiring materials and products (purchasing and positive stock adjustments) and manufacturing. Any incoming stock movements can affect the moving average cost and any outgoing stock movements don't affect MAC (as they use the existing MAC for the outgoing movement"
Transactions that affect stock levels:
Sales and purchases, stock transfers, stock adjustments, and manufacturing. Although, not all of these actions affect moving average cost.
Transactions that won't affect moving average cost:
Transactions that result in stock departing, including sales, negative stock adjustments, stock transfer for the origin location, and materials used in manufacturing.
NOTE: Using the moving average cost methodology means that the total cost of the entire stock in a location is divided equally between units, and the moving average cost is recalculated when new stock is added. Any outgoing stock transaction will use the moving average cost since all units of the same variant have the same unit cost.
Transactions that affect moving average cost:
Purchases with different prices -
Different purchase prices are the main aspect that affects the moving average cost of materials.
Positive stock adjustments -
Positive stock adjustments affect moving average cost because you set the unit cost for the new stock added to inventory. A negative adjustment removes stock from an existing inventory, so a new unit cost cannot be assigned.
Stock transfers -
Stock transfers affect the moving average cost on the destination location. Stock transfer acts as a sale from the origin location and a purchase for the destination location. The transferred inventory has a moving average cost from the origin location and keeps it when added to the destination location. If the moving average cost for the two locations is different, the transfer will affect the destination location's moving average cost.
Manufacturing affects moving average cost since it adds new products to inventory, and manufacturing costs vary. Manufacturing doesn't affect the moving average cost of ingredients for the product because using the ingredients removes them from stock.