Moving Average Cost (MAC)
Moving average cost is a method of inventory valuation that calculates the average cost of a group of items in inventory by taking into account the cost of the items purchased or produced over a period of time.
Planufac's MAC is based on all inventory over all time, whether there are units in stock or not. Its used as a unit cost price tracker and not a means of valuing the overall inventory. For overall inventory valuation Planufac can either use FIFO or Average costing
Consider the following:
A new product is created and a purchase order is raised for 100 units. The units cost £1.00 each.
Once the order is marked as received, the units go into stock and the MAC is recalculated, in this case the MAC will be £1 which is the same as the Purchase Order.
A month later, nearly all the units have sold and you wish to buy some more. Because you've been such a good customer to the supplier they reduce the price to £0.90 per unit.
You raise a purchase order for another 100 units, this time at the cost of £0.90 per unit.
The purchase order is marked as received and the inventory goes into stock, the MAC is now recalculated as follows:
£1.00 + £0.90 divided by 2 (as you have purchased this item twice) = £0.95
A further month later, you wish to buy some more. The product has been selling well so you increase the amount of units this time. The supplier recognises the larger order and reduces the price to £0.70 per unit.
You raise a purchase order for another 1000 units, this time at the cost of £0.70 per unit.
The purchase order is marked as received and the inventory goes into stock, the MAC is now recalculated as follows:
£1.00 + £0.90 + £0.70 divided by 3 (as you have now purchased this item three times) = £0.86
The MAC is useful for tracking the price of a product over time when compared with the AC (Average Cost)
If the MAC is higher than the AC then the price is coming down or vice versa.