How is the Average cost calculated?
Average cost is calculated on FIFO(first in first out) basis of buying and selling. While the total value (Quantity*Avg Cost) is called as holding cost. Let’s understand this calculation by taking an example:
On 1st Sep:
| Date | Buy/Sell | Quantity | Cost | Value |
|---|---|---|---|---|
1st Sep | Buy | 150 | Rs. 1000 | Rs. 1,50,000 |
2nd Sep | Buy | 50 | Rs. 1100 | Rs. 55,000 |
200 | Rs. 1025 | Rs. 2,05,000 |
- Orders placed: 1st order: Quantity = 150 | Cost = Rs. 1000
- 2nd order: Quantity = 50 | Cost = Rs. 1100
To calculate the average cost, first calculate the value (Quantity x Cost). Hence:
- 1st trade: Rs. 1,50,000
- 2nd trade: Rs. 55,000
- Total quantity = 200
- Total value: Rs. 2,05,000
- Divide total value by total quantity:
- Rs. 2,05,000 ÷ 200 = Rs.1025 is the average cost
While the holding cost, now let us see what happens when you add a sell order to this.
On 10th Sep:
| Date | Buy/Sell | Quantity | mobile_header | Cost | Value |
|---|---|---|---|---|
1st Sep | Buy | 150 | Rs. 1000 | Rs. 1,50,000 |
2nd Sep | Buy | 50 | Rs. 1100 | Rs. 55,000 |
200 | Rs. 1025 | Rs. 2,05,000 | ||
10 Sep | Sell | 100 | Rs. 1200 | Rs. 1,20,000 |
Sell order placed on 10th Sep: 100 (out of 200) at Rs. 1200
Now the FIFO method will be applied here. The method will check the first trade (on the buy-side). In this case, it is 150. 100 will be deducted from 150. The balance left is shown below.
After applying the FIFO method, Balance: 150 - 100 = 50
| Date | Buy/Sell | Quantity | Cost | Value |
|---|---|---|---|---|
1st Sep | Buy | 50 | Rs. 1000 | Rs. 50,000 |
2nd Sep | Buy | 50 | Rs. 1100 | Rs. 55,000 |
100 | Rs. 1050 | Rs. 1,05,000 |
In case the sell quantity was more than 150, then it would have moved to the next trade to deduct the remaining quantity.)
Average cost = Total Price ÷ Total Quantity i.e. Rs. 1,05,000 ÷ 100 = Rs. 1050 is the new average cost