# Cost Calculation Methods

The Profit Module can calculate the cost in one of two ways:

- Fixed Cost Method (FXCO)
- Average Cost Method (AVCO)

You need to make sure that the way you initially set this up reflects how you manage stock in your business.

#### FIXED COST METHOD

You should only use the **Fixed Cost Method** when either of the below two statements are true for your business:

- My product cost is
*always the same* - I restock only
I have in stock*after I sell all the products*

Fixed Cost Method does not take into account difference in costs of product you already have in stock. It is only suitable for a tiny portion of the businesses we work with. Let us explain why:

Product costs usually change over time. Sometimes you have more than one supplier for the same product and they don't sell you the product at same purchase price.

*You buy 10 units of product ABC123 for $100 each.*

*A week later, you buy another 5 units of product ABC123 for $90 each (Maybe a sale from the same supplier or you buy them from a different supplier). **When you receive the 5 units at the lower price, you add them to your inventory using the new cost price of $90. *

Using Fixed Cost Method, all 15 items you have in stock now have a cost of **$90**. This value will be used for calculations, even when a customer buys all 15 ABC123 you have in stock.

This is not accurate because you have 10 units of product ABC123 in stock with a cost price of $100. As a result, data in profit reports will be not accurate.

#### AVERAGE COST METHOD

**Average Cost Method** takes into account:

- Your previous product costs associated with the current stock quantity
- New product cost with restock quantity

The formula that is used in the calculations using this method is quite simple:

**Average Product Cost = Total Stock Value / Total Stock Quantity**

Letâ€™s revisit the example from before:

*You buy 10 units of product ABC123 for $100 each. **A week later, you buy another 5 units of product ABC123 for $90 each*.

((10 * 100) + (5 * 90)) / 15 = 96.67

Your new product cost is now **$96.67 **and this value will be used when a customer buys one or more of the ABC123s that you have in stock.

*Product ABC123 is a great selling product for your business. On the first day you already sold 7 units. You now have 8 units left in stock with a cost price $96.67. **Planning for future demand, you buy another 5 ABC123s, but from a different supplier that can deliver them tomorrow. The catch is the cost price is $110 each!*

((8 * 96.67) + (5 * 110)) / 13 = 101.80

Your new product cost for ABC123 is now **$101.80.**