How does QuickBooks Calculate Cost of Goods Sold? Average Cost Valuation

In this blog post I wanted to discuss how QuickBooks calculates cost of goods sold. There are several accounting methods for inventory valuation, but the one QuickBooks uses is called the Average Cost Valuation Method. Let’s look at a brief example.

Let’s assume we sell widgets and decide to purchase 100 widgets for $1.00 each.

Our Inventory Account will have a balance of $100

Next month we purchase 100 of the same product for $1.50 each.

Our Inventory Account will now have a balance of $250. (The $100 prior balance plus the $150 we just purchased)

Behind the scenes QuickBooks will calculate the cost of each product as $1.25 because this is the average price we paid for this specific widget ($250 Inventory Balance divided by the 200 widgets that we have on hand)

Next time you sell a widget, QuickBooks will add $1.25 for each widget sold into the Cost of Goods Sold account as an expense.

I made the video below showing an example of this in QuickBooks.

If you have any additional questions, please feel free to ask them in the comments below.