Let's execute the business flow with Average Price as the costing method for the product internal category:
| Seq. | Cost Price of Product | (Sale / Purchase) | Inventory Valuation | Cost Price of Product (after Operation) |
| 1 | 60 | 100 quantity at the rate of 70 | 7,000 ((0 + 7000) / (0 + 100)) * 100 | 70 |
| 2 | 70 | 100 quantity at the rate of 75 | 14,500 ((7,000 + 7,500) / (100 + 100)) * 200 | 72.50 |
| 3 | 72.50 | 100 quantity at the rate of 65 | 21,000 ((14,500 + 6,500) / (200 + 100)) * 300 | 70 |
The cost price will be computed when the costing method is an average price. It will be computed each time an incoming shipment is received in the Warehouse. Cost price is based on the following formula:
cost price = (value of existing stock + value of purchased stock) / (existing quantity + purchased quantity)
The Inventory valuation for the product can be computed using this following formula:
Inventory Value = ((value of existing stock + value of purchased stock) / (existing quantity + purchased quantity)) * Total quantity
