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:

Date Buy/Sell Quantity Cost Value
1st SepBuy150Rs. 1000Rs. 1,50,000
2nd SepBuy50Rs. 1100Rs. 55,000
200Rs. 1025Rs. 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:

  • 1st trade: Rs. 1,50,000
  • 2nd trade: Rs. 55,000
  • 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

Date Buy/Sell Quantity | mobile_header Cost Value
1st SepBuy150Rs. 1000Rs. 1,50,000
2nd SepBuy50Rs. 1100Rs. 55,000
200Rs. 1025Rs. 2,05,000
10 SepSell100Rs. 1200Rs. 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

Date Buy/Sell Quantity Cost Value
1st SepBuy50Rs. 1000Rs. 50,000
2nd SepBuy50Rs. 1100Rs. 55,000
100Rs. 1050Rs. 1,05,000

In case the sell quantity was more than 150, then it would have moved to the next trade to deduct the remaining quantity.)

Average cost = Total Price ÷ Total Quantity i.e. Rs. 1,05,000 ÷ 100 = Rs. 1050 is the new average cost