Costing Methods

How Cirrus costing methods work

Escrito por Rubén Mosqueda Herrera
Actualizado hace más de una semana

Accounting Schema window allows users to set a costing method for organizations. Here, you can choose between Average PO and Standard Costing methods :

Once you have set this configuration, you can view and edit product costs - according to the selected costing method -  for products in Charge Master II (Product Maintenance) window, in Cost tab : 

Here we will explain how each of these two costing method work :

  • Standard Cost

A standard cost system determines the unit cost of inventory based on certain reasonable historical or expected costs. Records of past costs and of anticipated future costs can provide a basis for calculating standard costs.

This costing method only considers expected costs according to historical records of standard rates and quantities :

Standard Cost Formula = Standard Rate * Standard Quantity

  • Average PO Cost

Average costing method assigns an inventory cost based on the total cost of goods purchased or produced in a period divided by the total number of goods purchased or produced.

The weighted average cost per unit is calculated using the following formula:

When new products arrive at the hospital, the new average cost is calculated as:

Average Cost = ((Existing Quantity*Average Cost) + (Received Quantity* Purchase Price))/Final Inventory


A purchase order is created to the supplier for 10 pieces of product 01040720 at a purchase price of $100.00 each.

This purchase order is completed to request the product from the supplier. Now, select Material Receipt to generate a product reception document :

When completing the Material Reception, the system will post this material receipt and update the average cost.

Here we can see the accounting entry where we can verify that the accounting transaction was made based on the price with which we bought the product.

Then we can validate the average cost of our product in either Product Costs or Charge Master II windows : 

When making a second purchase of 20 pieces at a cost of 850 SAR, at the time of making the material receipt, Cirrus will update the average cost using the formula:

Average Cost = ((Existing Quantity*Average Cost) + (Received Quantity* Purchase Price))/Final Inventory

By completing the second material reception, we can see that the average cost is now 600 of SAR .

Updated Product Cost :

Now when making a return of any of the material receipts, the accounting entry must be accounted for using the amount with which it was originally accounted for. Below there is an example of material reception reception with the accounting for the original amount of the receipt and recalculating the average cost of the product after completing the return.

When returning the 10 pieces of the receipt of 1,000 SAR, Cirrus makes the adjustment that will exclude the cost of these 10 pieces, see these details in Charge Master II (Product Maintenance) or in Product Costs  :

At the end of each of the transactions, it recalculates the average cost with the total of the stocks and the accumulated amount of the receipts made of this product.

All transactions made in the warehouse (inventory transfers and adjustments) will be made using the average cost, as well as the inventory valuation of said product.

We hope this improves your Cirrus experience. Remember to share this information and ask for help if you need it.

Date: August 30, 2023.

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