Choose the right inventory costing method to accurately track product costs, calculate profit margins, and maintain proper financial records. Pulse Commerce supports two costing methods: Fixed Cost and Average Cost.
Inventory costing methods determine how Pulse Commerce calculates and updates the cost of each SKU. The method you choose affects profit margin calculations, inventory valuation, and financial reporting.
Available Costing Methods
| Method | How It Works | Best For |
| Fixed Cost | Cost remains constant until manually updated in the Product Editor | Products with stable, predictable costs from a single vendor |
| Average Cost | Cost automatically recalculates based on weighted average of all inventory receipts | Products with fluctuating vendor costs or purchased from multiple suppliers |
With fixed costing, the product cost remains at the value you set in the Product Editor until you manually change it. This method provides consistency and predictability for financial planning.
How Fixed Costing Works
1You set the Costing Method when creating the product on the Simple tab or Product Import
2When you receive inventory via purchase orders or inventory adjustments, the system records the incoming cost but does not change the product's base cost
3To update the cost, manually edit the Cost field in the Product Editor and save
4The new cost applies to future margin calculations and inventory valuations
When to Use Fixed Costing
- Stable vendor pricing: Products with consistent costs that rarely change
- Manufactured products: Items with established production costs
- Single vendor sourcing: Products purchased exclusively from one supplier at negotiated rates
- Simplified accounting: Businesses preferring manual control over cost updates
Average costing automatically recalculates the product cost as a weighted average every time you receive inventory. This provides real-time cost accuracy for products with variable pricing.
How Average Costing Works
The system uses this formula:
New Average Cost = (Previous Inventory Value + New Inventory Value) / Total Quantity
1You set an initial cost when creating the product
2When inventory is received (via purchase order, inventory adjustment, or transfer), the system calculates:
- Previous Inventory Value = (Existing Qty × Current Average Cost)
- New Inventory Value = (Received Qty × Unit Cost from receipt)
- Total Quantity = Existing Qty + Received Qty
3The new average cost is automatically calculated and updated in the Product Editor
Average Costing Example
Scenario:
- ▪ Starting inventory: 10 units at $10 each = $100 total value
- ▪ Current average cost: $10
Receive new inventory: 5 units at $25 each
Calculation:
- ▪ Previous value: 10 × $10 = $100
- ▪ New value: 5 × $25 = $125
- ▪ Total value: $100 + $125 = $225
- ▪ Total quantity: 10 + 5 = 15 units
- ▪ New average cost: $225 ÷ 15 = $15
When to Use Average Costing
- Fluctuating vendor prices: Products with variable costs due to market conditions
- Multiple suppliers: Items sourced from different vendors at different price points
- Commodities: Products affected by commodity market pricing (metals, raw materials, etc.)
- Accurate margin tracking: Businesses needing real-time cost accuracy for profitability analysis
For products using average costing, there is a critical behavior to understand regarding zero inventory levels.
What Happens at Zero Quantity
When a product's quantity reaches zero (all units sold), the system resets the average cost to $0. This prevents divide-by-zero errors in the cost calculation formula.
The next time you receive inventory for this SKU, the average cost will be set to the unit cost of that first receipt, and average costing resumes from that point forward.
Preventing Cost Resets
To maintain continuous cost tracking for average-cost products:
- Set reorder points to trigger purchase orders before reaching zero inventory
- Monitor low-stock items and reorder proactively
- Keep minimum safety stock on hand for critical products
If a product does reach zero and you need to restore the previous average cost, you must manually update the cost in the Product Editor before receiving new inventory.
Decision Matrix
| Your Situation | Recommended Method |
| Products from single vendor with stable pricing | Fixed Cost |
| Products purchased from multiple vendors at different prices | Average Cost |
| Manufactured or assembled products with known costs | Fixed Cost |
| Commodities with market-driven pricing | Average Cost |
| Need manual control over cost changes | Fixed Cost |
| Need automatic cost updates reflecting purchase reality | Average Cost |
Document Your Decision
Before creating products, establish a company policy on which costing method to use for different product types. Document this in your internal procedures to ensure consistency across your catalog.
Review Costs Regularly
For fixed-cost products, schedule quarterly cost reviews to ensure costs reflect current vendor pricing. For average-cost products, periodically verify that the calculated average aligns with your expectations.
Track Cost Variances
Use reports to identify products where actual purchase costs significantly differ from the recorded cost. This helps catch pricing issues and opportunities to renegotiate with vendors.
Consider Accounting Impact
Consult with your accountant or financial advisor about which costing method aligns with your accounting practices and tax reporting requirements. Different methods may have implications for inventory valuation on financial statements.
Product Imports
- Product Import & Customer Group Pricing Import will impact an item that has Fixed Cost method.
- Product Warehouse Import will impact item that has Fixed Cost method.
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Inventory Import allows you to update cost in case of average cost items.