Group Average Cost Calculation

Understanding exactly how NetSuite calculates Group Average Cost is essential for accurate inventory valuation and financial reporting.

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The Formula

Group Average Cost Formula
═══════════════════════════════════════════════════════════════════════════════

                    Total Inventory Value (All Locations)
Group Average Cost = ─────────────────────────────────────────
                    Total Quantity on Hand (All Locations)


Expanded:

         Σ (Location₁ Value + Location₂ Value + ... + Locationₙ Value)
GAC = ─────────────────────────────────────────────────────────────────────
         Σ (Location₁ Qty + Location₂ Qty + ... + Locationₙ Qty)

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Step-by-Step Calculation

Initial State

Starting Point - No Inventory
═══════════════════════════════════════════════════════════════════════════════

Item: WIDGET-A
Locations: Main Warehouse, East DC, West DC

All locations: 0 qty, $0 value
Group Average Cost: N/A (no inventory)

Receipt 1: Main Warehouse

Transaction: Purchase Receipt #1
═══════════════════════════════════════════════════════════════════════════════

Receipt at Main Warehouse: 100 units @ $10.00

CALCULATION:
─────────────────────────────────────────────────────────────────────────────

  Location          Qty     ×    Cost    =    Value
  ──────────────────────────────────────────────────────
  Main Warehouse    100          $10.00       $1,000.00
  East DC             0           -              $0.00
  West DC             0           -              $0.00
  ──────────────────────────────────────────────────────
  TOTAL             100                       $1,000.00

  Group Average Cost = $1,000.00 / 100 = $10.00

─────────────────────────────────────────────────────────────────────────────

RESULT:
┌─────────────────────────────────────────┐
│  Group Average Cost = $10.00            │
│  All locations use this cost            │
└─────────────────────────────────────────┘

Receipt 2: East DC (Different Price)

Transaction: Purchase Receipt #2
═══════════════════════════════════════════════════════════════════════════════

Receipt at East DC: 50 units @ $14.00

BEFORE:
  Total Qty: 100 units
  Total Value: $1,000.00
  Group Avg: $10.00

NEW RECEIPT:
  50 units × $14.00 = $700.00

CALCULATION:
─────────────────────────────────────────────────────────────────────────────

  Location          Qty     ×    Cost    =    Value
  ──────────────────────────────────────────────────────
  Main Warehouse    100          $10.00       $1,000.00
  East DC            50          $14.00         $700.00  ← NEW
  West DC             0           -              $0.00
  ──────────────────────────────────────────────────────
  TOTAL             150                       $1,700.00

  Group Average Cost = $1,700.00 / 150 = $11.3333...

─────────────────────────────────────────────────────────────────────────────

RESULT:
┌─────────────────────────────────────────┐
│  Group Average Cost = $11.33            │
│  (Rounded to 2 decimal places)          │
└─────────────────────────────────────────┘

IMPORTANT: Main Warehouse inventory is now ALSO valued at $11.33
           Even though it was purchased at $10.00!

Receipt 3: West DC (Another Price)

Transaction: Purchase Receipt #3
═══════════════════════════════════════════════════════════════════════════════

Receipt at West DC: 75 units @ $12.00

BEFORE:
  Total Qty: 150 units
  Total Value: $1,700.00 (revalued)
  Group Avg: $11.33

NEW RECEIPT:
  75 units × $12.00 = $900.00

CALCULATION:
─────────────────────────────────────────────────────────────────────────────

  Location          Qty         Value (Current)
  ──────────────────────────────────────────────────────
  Main Warehouse    100         $1,133.00  (100 × $11.33)
  East DC            50           $566.50  (50 × $11.33)
  West DC            75           $900.00  (75 × $12.00) ← NEW at receipt cost
  ──────────────────────────────────────────────────────
  TOTAL             225         $2,599.50

  Group Average Cost = $2,599.50 / 225 = $11.5533...

─────────────────────────────────────────────────────────────────────────────

RESULT:
┌─────────────────────────────────────────┐
│  Group Average Cost = $11.55            │
└─────────────────────────────────────────┘

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When Recalculation Occurs

Triggers for Recalculation

Transaction Type	Triggers Recalc?	Details
Purchase Receipt	Yes	New inventory at purchase price
Item Receipt	Yes	Receiving against PO
Vendor Bill (3-way)	Yes	If price differs from receipt
Inventory Adjustment (+)	Depends	Only if cost specified
Inventory Adjustment (-)	No	Uses current average
Assembly Build	Yes	Components consumed, assembly received
Work Order Completion	Yes	WIP transferred to finished goods
Transfer Order	No	No cost change (same company)
Sale/Fulfillment	No	Uses current average
Return (Customer)	No	Returns at current average
Return (Vendor)	No	Removes at current average

Recalculation Timing

Cost Engine Processing
═══════════════════════════════════════════════════════════════════════════════

Transaction Posted
       │
       ▼
┌─────────────────────┐
│  Queue for Costing  │
│  Engine Processing  │
└─────────┬───────────┘
          │
          ▼
   ┌──────────────┐
   │ Cost Engine  │ ◄─── Runs hourly (configurable)
   │   Process    │
   └──────┬───────┘
          │
          ├──► Recalculate affected items
          │
          ├──► Update inventory values
          │
          ├──► Generate GL adjustments
          │
          └──► Mark transaction as costed

Note: Group Average recalculation happens during Cost Engine runs,
      not immediately upon transaction save.

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Calculation Examples

Example 1: Multiple Receipts, One Sale

Complete Transaction Sequence
═══════════════════════════════════════════════════════════════════════════════

STEP 1: Receipt at Location A - 100 @ $10
────────────────────────────────────────────
  Before: 0 qty, $0 value
  Receipt: 100 × $10 = $1,000
  After:  100 qty, $1,000 value

  Group Avg = $1,000 / 100 = $10.00

STEP 2: Receipt at Location B - 60 @ $15
────────────────────────────────────────────
  Before: 100 qty, $1,000 value, Avg $10.00
  Receipt: 60 × $15 = $900
  After:  160 qty, $1,900 value

  Group Avg = $1,900 / 160 = $11.875 → $11.88

STEP 3: Sale from Location A - 40 units
────────────────────────────────────────────
  Before: 160 qty, $1,900.80 value (160 × $11.88)
  Sale: 40 × $11.88 = $475.20 (COGS)
  After:  120 qty, $1,425.60 value

  Group Avg = $11.88 (unchanged - sales don't recalc)

STEP 4: Receipt at Location A - 80 @ $13
────────────────────────────────────────────
  Before: 120 qty, $1,425.60 value, Avg $11.88
  Receipt: 80 × $13 = $1,040
  After:  200 qty, $2,465.60 value

  Group Avg = $2,465.60 / 200 = $12.328 → $12.33

═══════════════════════════════════════════════════════════════════════════════

FINAL STATE:
  Location A: 140 units @ $12.33 = $1,726.20
  Location B:  60 units @ $12.33 = $  739.80
  TOTAL:      200 units           = $2,466.00

Example 2: Assembly Build Impact

Assembly Build with Group Average
═══════════════════════════════════════════════════════════════════════════════

Assembly Item: FINISHED-PRODUCT
Components Required:
  - 2 × COMPONENT-A (Group Avg: $5.00)
  - 3 × COMPONENT-B (Group Avg: $8.00)
  - 1 × COMPONENT-C (Group Avg: $12.00)

BUILD: 10 assemblies

COMPONENT CONSUMPTION:
────────────────────────────────────────────
  Component-A: 20 units × $5.00  = $100.00
  Component-B: 30 units × $8.00  = $240.00
  Component-C: 10 units × $12.00 = $120.00
  ─────────────────────────────────────────
  Total Component Cost:           $460.00

ASSEMBLY RECEIVED:
────────────────────────────────────────────
  10 × FINISHED-PRODUCT received

  Cost per Assembly = $460.00 / 10 = $46.00

If FINISHED-PRODUCT already had inventory:
────────────────────────────────────────────
  Before: 25 units @ $44.00 = $1,100.00
  Build:  10 units @ $46.00 = $  460.00
  After:  35 units           = $1,560.00

  New Group Avg = $1,560 / 35 = $44.57

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Precision and Rounding

NetSuite Rounding Rules

Rounding Behavior
═══════════════════════════════════════════════════════════════════════════════

Standard Rounding: 2 decimal places for currency

Example Calculation:
  Total Value: $1,700.00
  Total Qty: 150

  Exact: $1,700 / 150 = $11.333333...
  Rounded: $11.33

Rounding Variance:
  150 × $11.33 = $1,699.50
  Actual value: $1,700.00
  Variance: $0.50 (absorbed in rounding)

This small variance is normal and typically immaterial.

Extended Precision Settings

Some NetSuite accounts allow extended precision:

Setting	Decimal Places	Use Case
Standard	2	Most businesses
Extended	4-6	High-volume, low-margin items
Quantity	0-6	Depends on unit of measure

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Edge Cases

Zero Quantity Scenarios

What Happens When Quantity Reaches Zero?
═══════════════════════════════════════════════════════════════════════════════

Scenario: Sell all inventory

  Before: 100 units @ $10.00 = $1,000
  Sale:   100 units @ $10.00 = $1,000 (COGS)
  After:    0 units

RESULT:
  - Quantity: 0
  - Value: $0
  - Average Cost: RETAINED at $10.00

WHY?
  NetSuite keeps the last average cost for:
  - Future receipts (as reference)
  - Returns processing
  - Reporting consistency

Next Receipt:
  - New receipt of 50 @ $12.00
  - Fresh calculation: 50 × $12 = $600
  - New Average: $12.00 (last $10.00 is replaced)

Negative Inventory

Negative Inventory Handling
═══════════════════════════════════════════════════════════════════════════════

If Allow Negative Inventory is enabled:

  Before: 10 units @ $10.00 = $100
  Sale:   15 units @ $10.00 = $150 (COGS)
  After:  -5 units @ $10.00 = -$50

Average Cost: Still $10.00 (unchanged)

When Receipt Arrives:
  Before: -5 units @ $10.00 = -$50
  Receipt: 20 @ $12.00 = $240

  Net Qty: -5 + 20 = 15 units
  Net Value: -$50 + $240 = $190

  New Average: $190 / 15 = $12.67

⚠️ WARNING: Negative inventory can cause costing anomalies
            Avoid if possible for accurate costing

Backdated Transactions

Backdated Transaction Impact
═══════════════════════════════════════════════════════════════════════════════

Current Date: Jan 15
Current Average: $12.00

Backdated Receipt Entered: Jan 5, 100 @ $8.00

WHAT HAPPENS:
─────────────────────────────────────────────────────────────────────────────

1. Cost Engine identifies backdated transaction

2. Recalculates average as of Jan 5
   (inserting the receipt in chronological order)

3. Rolls forward all subsequent transactions:
   - Jan 6 sale: COGS recalculated with new average
   - Jan 7 receipt: Average recalculated
   - Jan 10 sale: COGS recalculated
   - ... continues to present

4. GL adjustments generated for any differences

5. Current average may change from $12.00

⚠️ IMPACT: Backdated transactions can cause cascading recalculations
           and GL adjustments across many transactions!

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Formula Reference Card

Quick Reference - Group Average Formulas
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BASIC AVERAGE:
─────────────────────────────────────────────────────────────────────────────
  GAC = Total Value / Total Quantity

AFTER RECEIPT:
─────────────────────────────────────────────────────────────────────────────
  New GAC = (Old Value + Receipt Value) / (Old Qty + Receipt Qty)

  Where:
    Old Value = Old Qty × Old GAC
    Receipt Value = Receipt Qty × Receipt Unit Cost

AFTER SALE:
─────────────────────────────────────────────────────────────────────────────
  GAC = Unchanged (sales don't affect average)

  COGS = Sale Qty × Current GAC
  New Value = Old Value - COGS
  New Qty = Old Qty - Sale Qty

AFTER ADJUSTMENT (Qty Only):
─────────────────────────────────────────────────────────────────────────────
  GAC = Unchanged

  Increase: New Value = Old Value + (Adj Qty × Current GAC)
  Decrease: New Value = Old Value - (Adj Qty × Current GAC)

AFTER ADJUSTMENT (With Cost):
─────────────────────────────────────────────────────────────────────────────
  New GAC = (Old Value + Adj Value) / (Old Qty + Adj Qty)

  Where Adj Value = Adj Qty × Specified Cost

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Next Steps

• Multi-Location Scenarios - Complex transfer scenarios
• GL Impact - Journal entries and accounting
• Migration Guide - Switching costing methods