PO RECEIVING – UPDATE COST

Weighted Average Cost and Finished Goods Purchase Orders.
Updating Cost/Value.
If preferences are set to update inventory cost and value after the PO is complete, it is possible to end up with an inventory cost and value that is HIGHER than the cost on the PO. This is due to the mathematics of weighted average costing.
Example:
Start with 10 units in stock at $3.00
Total value is $30.00
Receive on a Purchase Order 10 units, with the PO marked at $5.00 each.
Do not update Cost and Value.
Sell 12 items: Cost of the 12 will be recorded as $3.00 each, or $36.00 total. (In reality, too little).
On the PO, now click on Update Cost and Value.
The $20.00 increased value of the PO is distributed over the remaining 8 items in stock, thus raising their average cost and value to $5.50 (in reality, too high).
When these final items are sold on a second invoice the system will then be in actual balance.

The first invoice understated actual cost.
The second invoice overstated actual cost.
The average cost was calculated correctly and total cost of goods sold is correct.