Correct Average Cost

Sounds like the right thing to do to make all correct, but I would think if the item has been sold it is no longer IN inventory for you to edit cost nor to be included in the average cost to be computed

Interesting, since it would be too late to bill customer at "cost" plus mark-up at that point. 

That would not pass audit in my industry, since that is the whole point of average costing. 

Please note that this is only a Notational field: "Correct the cost in the Inventory Edit item, we know how to do this"

That doesn't affect Average. That is Notational, as data entry Jump Start. If I buy something at various costs, I can leave that as $0, or note my most likely cost or a quoted cost to document it.

What matters is this part, what you did and how you did it and when you did it: "When we setup our inventory we have a few items that were entered at a very wrong cost"

When you first started using QB, you set up Items. The Cost here is meaningless, because you are then going to use your most recent Physical Inventory to make one Adjust Inventory worksheet, entering Quantity and Cost on Hand, from that Physical Inventory.

Now, if instead, you used New Item, put in a Cost, and also entered On Hand Beginning Balance here, you made up Phony data. You told that system, "Hey, I just found some stuff!" And the system attempts to compute data you did not provide, so it assumes Cost in Edit item x Quantity you just put in the New Item entry, is Basis on hand. And the offset is Opening Balance Equity.

If you did it like that, then the Errors are in that Opening Balance Entry adjustment screen that got created each time you Made an Item and also put Beginning Quantity on hand. You need to fix each of these entries. Because you used a function that allowed you to provide an inadequate amount of info.

You Make New Accounts, New Names or New Items. Then you use the Functions, not the "field for beginning balances" to populate the actual data.

When your customer is the US Government and you agree to a price that is based on average cost plus say a material OH rate and a fee, then you get audited and average cost used to buildup price CHANGED on a past date when you had submitted a proposal and/or were billing inflated price to them since now you are showing the Govt customer that you overbilled them for an item, I think that is called "defective pricing" which could cause you to lose your contract, your customer and maybe your company.  

"And no, the client is not the US Government, so there is no long term GAAP paradox"

Governments are subject to GASB.

Teri's concern about Pricing, doesn't affect the issue of fixing Costs.

Govt Contractors (including small businesses) who sell products or services to Govt agencies like (DOD, NASA, Pentagon, etc). are always subject to GAAP and FAR (Federal Acquisition Regulation).

Their customers (the Govt agencies) are subject to GASB.

Whether Cost impacts Price depends on the contract type:

FFP = Firm Fixed Price per contract

CPFF = Cost Plus Fixed Fee = Price

Hi qbteachment -

Just saw this so wanted to clarify on the terminology between us here.

Yes, my comment about pricing IS impacted by changing cost for pricing.

You know my goal here is to help GovContractors from being misguided.

GASB is only applicable to STATE and LOCAL Govt (qbteachment is expert here)

GAGAS is applicable to U.S. FEDERAL Government (this is my area of expertise)

GASB (Govt AUDITING Standards BOARD) - Makes rules for auditing STATE & LOCAL Govt.

FASB (Financial ACCOUNTING Standards BOARD) - Makes rules for all NON-GOVT entities.

CASB (Cost ACCOUNTING Standards Board (Rules for Government Contractor accounting).

GASB & FASB are the BOARDS who write GAAP (Generally Accepted Accounting Principles).

GAAP (Generally Accepted Accounting Principles)/GAAS (Generally Accepted Auditing Standards)  

GAAP Must be followed by Public (SEC) companies AND ALL Govt contractors of ANY SIZE).

DCAA = Defense Contract Audit Agency (Audits for compliance with GAAP, CAS, FAR & IRS). 

Client - Is the company that I train to do their own accounting for Govt contracts (who pays me).

Customer - My client has customer contract or subcontract (that pays them for the work they do).

My client may have Prime contract to do work directly for a U.S. Government entity (Army, Navy, etc.)

Or may have a Subcontract, where they do work for a Prime contractor whose customer is Govt entity. They may even be a 2nd tier Subcontractor, like small biz working for SAIC whose customer is Govt.

If the END customer is U.S. Govt, there are contract clauses that flow down to the subcontractor(s).   

I am using QB Pro 2020 

We had lottery tickets and the cost of the ticket is $5.00 but the average cost is $300.00 per ticket. It is using that $300.00 in "other assets" and in COGS. I have tried and tried to be able to change the amount to $5.00 but it will not let me change it. it is adding 60 X $300.00 in other assets and in COGS instead of 60 X $5.00 or $18,000 instead of $300.00.

Can anyone help me with this? 

Thank you

Welcome to the Community space, @Ted D.

Thanks for providing screenshot. Let me provide you some insights on how QuickBooks calculate average cost. 

When you sell what you don't have in stock, QuickBooks will post the current average cost to COGS. When you buy items, QuickBooks compares them to the average cost used when sold what you do not have. If there's a difference, QuickBooks makes an adjustment entry to both inventory assets and COGS. 

If you're having a high cost posted, then it means that the item doesn't have an established average cost. Established average cost comes from purchases of the item, qty, and total cost of that qty.

As a workaround, we can create an adjustment to these items. If you have entered these items without using them in a transaction you can delete and recreate the item and enter the correct amounts. 

Here's how:

1. Go to the Lists menu, choose Item List.
2. Click the Activities drop-down then select Adjust Quantity/Value on Hand. 
3. Input the correct details then check the Item Info After Adjustment at the bottom-left of the window.
4. Click Save & Close once finished.

You can also recreate the items by batch using the Add/Edit Multiple List Entries options. Please refer to this article for more info: Add and edit multiple customers, vendors, and items.

Let me know if you have further concerns. I'd be glad to lend a hand. Keep safe and healthy.

Hello~

I want to make sure I understand this correctly.  The average cost is (incorrectly) inflated due to a) original cost being entered incorrectly, or b) the cost changes everytime an item is sold, when not on hand, per QB?  For example, one of our items is part of a bill of materials.  the normal average cost of this SHOULD be 373.18, however, it is showing a -2314.16 for the average cost and -33 on hand, because it has to be mixed with another product for the final product - which has been done, physically, but the BOM has not been generated yet in QB to zero out the QOH.    There has to be another explanation than the -33 on hand changing that cost.  I know the original costs were put in correctly.  Am I misunderstanding your explanation?  Is there anyway to change to a FIFO system in Premier Mfg & Wholesale 2020 version?  This average cost changes so much and is frequently incorrect and we can't seem to change it to the correct prices.  Any breakdowns would be appreciated...

Thanks for following on this thread, dwade1.

The average cost is calculated by dividing the total cost of goods available by the total items available for sale. This provides a weighted average cost that’s applied to the products in the ending inventory. The information mentioned above is correct. Any changes in the cost affect the average cost of your item.  Here’s an article that provides more insights on how QuickBooks handles inventory accounts and the average cost: Understand inventory assets and cost of goods sold tracking.

Also, changing the average costing to FIFO is unavailable in the Premier version. You’ll have to subscribe to QuickBooks Enterprise to use the feature.

In regard to the discrepancy in the quantity and average cost, we’ll have to perform in-depth troubleshooting to determine the root cause. Here in the Community, I’m unable to collate sensitive data for security reasons. I recommend you get in touch with our Technical Support Team since they have tools to review the setup of your inventory. Once the solution is available, our specialists will help you apply the permanent fix.

1. Choose the Help icon at the top menu bar to select QuickBooks Desktop Help F1.
2. In the Have a Question window, scroll down to choose the Contact us link.
3. Navigate to Tell us more about your question section to enter the issue or topic in the field box.
4. Press the Search button to display the Get Phone Number or Start a Message button.

For other ways on how to reach out to our support team, follow the instructions in this guide, and proceed to the How to message us outside of the product section: Contact QuickBooks Desktop support.

To help easily manage your inventory, here's a link that contains a breakdown of our self-help articles: QuickBooks Desktop.

Reach out to me if you have any clarifications or questions about QuickBooks. I’ll be right here to answer them for you.

Did this ever get resolved? I have the same average cost issue that is causing my COGS to be in the millions.

Hello sweetesthoneybee,

Thank you for reaching out to the Community! As mentioned by my colleague Rasa-LilaM above, the best move is to contact support in a secured environment to investigate this matter further. They will be able to use a screen-sharing tool and run some tests to determine the cause of this problem.

Would you please let me know how the interactions go? If you have any questions, don't hesitate to let us know.

Our general ledger did NOT change when I tried this solution!!!

Do I have to wait for an overnight-update?

I can see the change in reports as "transaction detail by account"

But the trial balance did NOT change!

I've got you covered in repairing your damaged company file in QuickBooks Desktop, aht1.

We can run the Inventory Valuation Summary report if you have any questions about an average cost. This shows you how QuickBooks got the item's average cost.

1. Go to Reports, on the top menu.
2. Select Inventory.
3. Select Inventory Valuation Summary, then set the dates to All.
4. Double-click the item in question.

Once done, run the General Ledger and Trial Balance report to see if it will provide you with the correct data. QuickBooks will post the current average cost to COGS when you sell what you don't have in stock. QuickBooks compares them to the average cost used when selling what you do not have when you buy items. Then, the software makes an adjustment entry to both inventory assets and COGS if there's a difference. Here’s an article that provides more insights on how QuickBooks handles inventory accounts and the average cost: Understand inventory assets and cost of goods sold tracking.

If the same thing happens, we can update QuickBooks Desktop to the latest release. Once done, use the Rebuild Data tool to automatically fix minor company file data issues. Here's how:

1. Go to the File menu, then hover over Utilities and select Rebuild Data.
2. On the QuickBooks Information window, press OK. Follow the onscreen steps to save a backup.
3. Let the tool repair your file. It may take some time. QuickBooks may seem stuck, but as long as you can move your mouse, the tool is working.
4. When the tool finishes, press OK.
5. Go to the File menu. Then hover over Utilities and click Verify Data.
6. Let the tool check your file for data issues.

If QuickBooks doesn't find any problems, press OK. You can keep using your company file if you don't have any data damage. Then, select Rebuild Now if QuickBooks finds an issue with your company file.

If you’re still having data issues after rebuilding your company file, try again. If you still have data issues, use the QuickBooks File Doctor to fix your company file. You can check out this article for more details about fixing data damage on your QuickBooks Desktop company file: Fix data damage on your QuickBooks Desktop company file.

I want to make sure I've got you covered. You can click the Reply button below for follow-up questions and clarifications about running your financial reports in QuickBooks. I'll be in touch.