Frequently Asked Questions: Can QuickBooks Bill Pay Make Paying Bills Easier?
When the cost of the products you purchase changes frequently, your profit margins can change right along with them. One shipment may cost significantly more than the last. Freight, supplier pricing, discounts, and other costs can also affect what you ultimately pay for inventory. When those changes flow through Cost of Goods Sold, it can become harder to understand whether your margins are actually improving or declining.
That leads to a common question:
- Why do my inventory costs and margins fluctuate so much?
Inventory costs and margins can fluctuate because of changing supplier prices, freight and other acquisition costs, inventory adjustments, and the method used to value inventory. Moving Average Cost in QuickBooks Online can help smooth the effect of changing purchase prices by recalculating the average cost of inventory as new purchases are received. This can provide more consistent inventory valuation and clearer visibility into Cost of Goods Sold and margins.
What causes inventory costs to fluctuate?
Inventory costs are rarely static. Your cost for the same product may change because of:
- Supplier price increases
- Quantity discounts
- Freight and shipping costs
- Customs or other acquisition costs
- Changes in manufacturing costs
- Inventory adjustments
- Different purchase quantities
These costs matter because the cost assigned to the products you sell ultimately affects your Cost of Goods Sold and gross profit. Accurately capturing the full initial cost of inventory, including applicable freight, manufacturing costs, taxes, discounts, and other acquisition costs, helps provide more accurate COGS and margin reporting.
How does inventory costing affect your margins?
Your inventory costing method determines how inventory costs move from the Balance Sheet to Cost of Goods Sold when products are sold. That directly affects the gross margin you see on your financial statements.
When purchase prices fluctuate significantly, the costing method can make changes in COGS and margins more noticeable from one period to another. That does not necessarily mean the business suddenly became more or less profitable. Part of the change may be related to how inventory costs are being calculated.
What is Moving Average Cost?
Moving Average Cost, or MAC, calculates an average cost for the units you have available. When you purchase additional inventory at a different price, the average is recalculated based on the value and quantity of the inventory you already have and the new inventory you purchased.
For example, if you have inventory purchased at one price and then receive more of the same item at a higher price, MAC incorporates both costs rather than assigning the newest purchase price to every unit. This can smooth some of the impact of changing purchase prices.
How can Moving Average Cost help?
For the right type of business, Moving Average Cost can provide a more consistent view of inventory costs.
It can help:
- Smooth the impact of changing purchase prices
- Provide more consistent Cost of Goods Sold
- Improve inventory valuation
- Make margin trends easier to understand
- Provide clearer financial reporting
MAC is particularly useful for non-perishable inventory and situations where businesses experience fluctuating purchase prices.
Is Moving Average Cost right for every business?
No.
The appropriate inventory costing method depends on what you sell, how inventory moves through your business, how significantly purchase costs fluctuate, and your accounting requirements. That is why changing an inventory costing method should not be treated simply as a QuickBooks setting.
Before making a change, you need to understand how your current inventory is being valued, how costs are flowing into COGS, and how a different method could affect your financial reporting.
Look beyond the costing method
If your margins seem unusually volatile, the costing method should not be the only thing you review.
It is also worth looking at:
- Whether inventory items are set up correctly
- Whether purchase costs are being recorded accurately
- How freight and other costs are treated
- Whether inventory adjustments are occurring frequently
- Whether quantities on hand are accurate
- Whether sales prices have kept pace with rising product costs
Sometimes a fluctuating margin is revealing a real business issue rather than an accounting issue. That distinction is important.
When to get help
If inventory costs are difficult to understand or your margins seem to change without a clear explanation, reviewing the underlying inventory accounting can help identify what is actually driving the numbers.
One 8 Solutions can review your QuickBooks Online inventory setup, Cost of Goods Sold, and current workflow to determine whether Moving Average Cost is appropriate for your business and whether other accounting issues may be affecting your margins.
Want clearer visibility into your inventory margins?
If fluctuating inventory costs are making it difficult to understand profitability, we can review your inventory accounting and help determine whether Moving Average Cost or other changes to your QuickBooks Online setup can provide more accurate, useful financial reporting. Schedule a meeting today!
