Moving Average Price

Posted in Finance, Accounting and Economics Terms, Total Reads: 1502

Definition: Moving Average Price

In the accounting of records (like for the inventory), when the prices are assigned to goods using moving average, such prices are referred to as moving average prices.

Moving average prices are commonly used by businesses:

• When accounting for goods which are readily available

• When accounting for goods which have small fluctuations in cost

• When accounting for goods which are purchased externally

• When accounting for goods, where there is a need for inventory costs to reflect the current market costs

• When accounting for goods which are subject to purchase price fluctuations on a regular basis

Some example of goods which are accounted for, using moving average price are:

• Raw materials

• Spare parts

• Traded goods

Moving average prices are calculated as below:

Quantity (new) = Quantity (old) + Quantity (receipt)

Value (new) = Value (old) + Quantity (receipt) X {Price (receipt) / Price unit (receipt)}

Price (new) = {Value (new) / Quantity (new)} X Price unit (material master)

If goods are assigned a MAP (moving average price), then changes in the price results in the automatic adjustment of the prices in the material master record.

Some outcomes of using moving average price can be:

• Receipts are posted at receipt value (for goods)

• Material master prices are adjusted according to the delivery prices

• Differences in prices occur only under very specific circumstances

• Changing prices manually is usually un-necessary but is possible

• Administrative efforts are usually less as no cost estimates need to be maintained

Moving average prices are not used to account for semi-finished and finished products. This is because data-entry errors can fluctuate valuation of such goods during production inefficiencies and back-flushing of material or labor.

Hence, this concludes the definition of Moving Average Price along with its overview.

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