How Raw Materials Inventory Valuation Works
This document explains how the Recipe Cost Calculator values your raw materials inventory — how costs are tracked as you receive items at different prices and consume them over time.
Valuation Method: Weighted Average Cost
The Recipe Cost Calculator uses the Weighted Average Cost (WAC) method to value inventory. The cost of your on-hand stock is always a blended average of everything you've purchased, regardless of when individual units were received.
How Receiving Inventory Works
When you receive inventory (e.g., a delivery from a supplier), the system adds both the quantity and cost to your running totals:
New Quantity on Hand = Previous Quantity + Received Quantity
New Total Cost = Previous Total Cost + Received Cost Example: You have 10 kg of flour on hand worth $12.00 ($1.20/kg). You receive 5 kg at $7.50 ($1.50/kg).
After receiving: 15 kg on hand, $19.50 total cost, $1.30/kg.
The new cost per kilogram ($1.30) is a weighted average of the old cost ($1.20/kg) and the new purchase price ($1.50/kg), weighted by the quantities of each.
How Consuming Inventory Works
When inventory is subtracted (used in production, sold, wasted, etc.), the system reduces the total cost proportionally based on the fraction of quantity remaining:
New Quantity on Hand = Previous Quantity - Used Quantity
New Total Cost = Previous Total Cost × (New Quantity / Previous Quantity) This is equivalent to valuing each unit consumed at the current weighted average cost per unit.
Example (continuing from above): You use 6 kg of the flour (which now has an average cost of $1.30/kg).
Before: 15 kg, $19.50 total cost, $1.30/kg. After using 6 kg: 9 kg, $11.70 total cost, $1.30/kg.
The cost per unit stays the same ($1.30/kg) after a subtraction. Under weighted average costing, subtractions do not change the unit cost.
Periodic Counts (Physical Inventory)
A periodic count is a full snapshot of your inventory. Instead of adding or subtracting from the previous balance, it replaces the quantity and cost entirely with whatever you enter:
Quantity on Hand = Counted Quantity
Total Cost = Entered Cost (or leave blank to calculate based on current ingredient price) Use periodic counts for:
Full physical inventory counts — Count everything on the shelf and record exact quantities and costs.
Cycle counts — Spot-check a subset of items and correct any discrepancies.
Inventory corrections — Fix errors from miscounted deliveries or unrecorded waste.
After a periodic count, the system treats the entered values as the new baseline. All future additions and subtractions build on top of these numbers.
Cost Revaluation
The Recalculate Current Inventory Cost feature revalues your on-hand inventory using current ingredient prices. When you trigger a revaluation, the system:
Takes every item currently in inventory.
Keeps the quantity unchanged.
Recalculates the total cost using each ingredient's current purchase price.
Internally, this creates a periodic count for every item using the formula:
New Total Cost = Current Price per Unit × Quantity on Hand Example: You have 20 kg of butter on hand, valued at $100.00 ($5.00/kg). Your current supplier price is $5.50/kg.
After revaluation: 20 kg on hand, $110.00 total cost, $5.50/kg.
This is a write-up of $10.00. If the current price had dropped to $4.50/kg, it would be a write-down of $10.00 (new total: $90.00).
Storage Areas
If you use multiple storage areas (e.g., walk-in cooler, dry storage, freezer), inventory is tracked separately per location. Each storage area maintains its own quantity and cost for every item.
Transfers between storage areas move both quantity and cost from one location to another without changing the overall inventory value.
Lot Code Tracking (FIFO)
Lot codes provide physical traceability — tracking which specific batch of an ingredient you have on hand.
When inventory is subtracted, lot codes are consumed on a First In, First Out (FIFO) basis: the oldest lot is used up first before moving to newer lots.
Important distinction: FIFO applies only to which lot codes are consumed. The dollar cost reduction always uses the weighted average method described above. This means:
Lot tracking answers: "Which batch did I use?" (FIFO order)
Cost tracking answers: "What was it worth?" (weighted average)
These two systems work independently. You can use lot codes for traceability without it affecting your cost calculations.
The Inventory Report
The inventory report calculates your Actual Food Cost for a date range:
Actual Food Cost = Beginning Inventory + Purchases − Ending Inventory Where:
Beginning Inventory is the total cost of all items on hand at the start of the period.
Purchases is the total cost of all inventory received during the period.
Ending Inventory is the total cost of all items on hand at the end of the period.
Example: For the month of March — beginning inventory $5,000, purchases $12,000, ending inventory $4,500. Actual food cost = $5,000 + $12,000 − $4,500 = $12,500. This represents the total cost of inventory consumed during March — through production, sales, waste, or any other reason.
Putting It All Together
Here's a complete example showing how inventory value flows over a series of transactions for Olive Oil:
Start with zero inventory.
Receive 20 L at $4.00/L → 20 L on hand, $80.00 total cost, $4.00/L.
Use 8 L in production → cost reduced proportionally: $80.00 × (12/20) = $48.00. Now 12 L on hand, $48.00 total cost, $4.00/L.
Receive 10 L at $5.00/L → cost adds: $48.00 + $50.00 = $98.00. Now 22 L on hand, $98.00 total cost, $4.45/L.
Use 12 L in production → cost reduced proportionally: $98.00 × (10/22) = $44.55. Now 10 L on hand, $44.55 total cost, $4.45/L.
Revaluation at current price $4.80/L → 10 × $4.80 = $48.00. Now 10 L on hand, $48.00 total cost, $4.80/L (write-up of $3.45).
Physical count finds only 9 L → periodic count sets quantity to 9 and cost to 9 × $4.80 = $43.20.