Average cost is a costing method that adds up the cost of all identical items in stock and divides it by the total quantity. The result is the average cost per item. This value is then used to calculate the cost of goods sold. This method works best for products with stable prices.

Example of average cost calculation

An online store sells dresses. Three batches were purchased at different prices and added to stock receipts in Inventory management. To calculate the average cost per dress, the system adds the total cost of all batches and divides it by the total number of dresses.

We sold 400 dresses at an average cost of $49.88 each. To calculate the total cost, multiply the quantity sold by the average cost per item: 400 × 49.88 = $19,952.

The online store continues to receive new batches of dresses. With the average cost method, the average cost of items in stock changes whenever new shipments arrive at different prices. The system automatically recalculates the cost of goods sold, so you always know the actual purchase cost.

View results in the gross profit report

You can view sales results, gross profit, and gross margin in the report. Go to the Analytics tab in Inventory management and select Gross profit.

The report shows:

• Sales revenue. 800 dresses were received into the warehouse and sold for a total of $31,996.


• Cost (total). In this example, it equals $19,952. This is the total purchase cost of all sold dresses.


• Gross profit. It equals $12,048 and is calculated as sales revenue minus total cost.


• Gross margin. The gross margin is 60.36%.