Supply and demand is the central anchor of inventory management, and making sure you have enough stock on hand to meet order requests can be challenging, especially if you have variable peaks in your industry. By using the Moving Average Inventory Method, you can use historical inventory levels to predict future demand, thus empowering you to better plan financial and physical resources.
With the Moving Average Inventory Method, you re-calculate the average cost of each inventory item in stock after every inventory purchase. The calculation is the total cost of the items purchased divided by the number of items in stock. The Cost of Ending Inventory and the Cost of Goods Sold are then set at this average cost.
To use this method, you need to employ a perpetual inventory tracking system because the moving average cost changes whenever there is a new purchase. Up-to-date records of inventory balances are necessary to produce results in this method. The moving average method yields inventory valuations and cost of goods sold results that are in-between those derived under the first in, first out (FIFO) method and the last in, first out (LIFO) method. It is challenging to employ the moving average method when inventory records are recorded manually, and the additional clerical staff would be overworked by the number of required calculations. However, when the inventory valuations are calculated by a computerized system, the continual adjustments to valuations are always current and always accurate.