ProductsPricingResearchSupportPartner

# How is the Average cost calculated?

Average cost is calculated on FIFO(first in first out) basis of buying and selling. While the total value (Quantity*Avg Cost) is called as holding cost. Let’s understand this calculation by taking an example:

On 1st Sep:

1st Sep
150
Rs. 1000
Rs. 1,50,000
2nd Sep
50
Rs. 1100
Rs. 55,000
200
Rs. 1025
Rs. 2,05,000
• Orders placed: 1st order: Quantity = 150 | Cost = Rs. 1000
• 2nd order: Quantity = 50 | Cost = Rs. 1100

To calculate the average cost, first calculate the value (Quantity x Cost). Hence:

• Total quantity = 200
• Total value: Rs. 2,05,000
• Divide total value by total quantity:
• Rs. 2,05,000 ÷ 200 = Rs.1025 is the average cost

While the holding cost, now let us see what happens when you add a sell order to this.

On 10th Sep:

150

50

200

100

1st Sep
150
Rs. 1000
Rs. 1,50,000
2nd Sep
50
Rs. 1100
Rs. 55,000
200
Rs. 1025
Rs. 2,05,000
10 Sep
Sell
100
Rs. 1200
Rs. 1,20,000

Sell order placed on 10th Sep: 100 (out of 200) at Rs. 1200

Now the FIFO method will be applied here. The method will check the first trade (on the buy-side). In this case, it is 150. 100 will be deducted from 150. The balance left is shown below.

After applying the FIFO method, Balance: 150 - 100 = 50

1st Sep
50
Rs. 1000
Rs. 50,000
2nd Sep