Accurate profit margins are important for running your business. Here's how BLAZE can help.
Inventory cost calculations play a key role in helping businesses predict accurate profit margins. BLAZE offers two options to calculate inventory costs: Last Cost and Weighted Average.
Note: BLAZE calculates the product costs through purchase orders. Purchase orders can be accessed through your Dashboard > Purchase orders, where you can enter your quantity and cost information.
The “Last Cost” setting represents the last wholesale cost you purchased for a specific product and inputted into your most recent purchase order. Usually, companies start with the last cost option. This pricing strategy approximates profit margins over time.
Example:
In January, you ordered a product at a wholesale cost of $10.00. As you begin to sell this product, the wholesale cost will remain $10.00.
In March, you need to restock this product and place another order. This time the wholesale cost is $9.50. As you enter in the amounts for a new purchase order, the cost per unit/wholesale cost will now be $9.50 for the same product. All sales from this point forward will have a wholesale cost of $9.50 associated with this product.
Note: The shortcoming of the “Last Cost” is that it does not account for existing inventory at the time of a new purchase order.
Weighted Average
The “Weighted Average” setting represents all the historical wholesale costs paid for a specific product and the existing quantities bought at the time of their purchase. This pricing strategy accounts for changes in inventory costs over time which may help businesses predict more accurate profit margins.
Example:
You ordered 10 units of a product at a wholesale cost of $10.00. The wholesale cost for this product will remain at $10.00. This means that the value of your current product inventory is $100 (10 x $10). All sales from this point on have a wholesale cost of $10.00. During the month, you sell 6 units of this product and have a current inventory of 4.
You want to reorder another 10 units of this product. This time the wholesale cost is $9.50. The value of your newly received product will be $95.00 (10 x $9.50)
Your total inventory quantity after receiving the product is now 14 (4 + 10)
The weighted average cost setting is calculated by the following:
The weighted average inventory cost is now $9.64. All sales from this point on have a $9.64 cost associated with this product. As a result, customers have a much more accurate cost calculation that takes the existing inventory into account.
Note: The weighted average cost calculation can be harder to understand, and much more difficult to debug.
What to do if a cost is incorrect?
Costs can often be incorrect when there are manual entry errors with purchase orders. If there is a mistake, we recommend editing the product cost directly in the product itself.
Click in the "Wholesale cost" amount field button, view the disclaimer, then edit the cost. Note: Editing costs will not affect historical margins.
