All businesses guide
How to Calculate True Profit: Weighted Average Cost Explained
Many shops calculate profit as “sale price minus the last purchase price”. When prices move — and in Pakistan they move often — that number is wrong. Weighted average cost gives the real figure.
By Rana Yasir Ali, Founder & CEO6 min read
1. The problem with the last purchase price
If you bought 100 units at Rs 90 and then 100 more at Rs 110, the units on your shelf did not all cost Rs 110. Using the latest price understates profit; using the oldest overstates it.
2. How weighted average cost works
After every purchase, the cost per unit is recalculated from the value of everything in stock divided by the quantity in stock.
| In stock | 100 units at Rs 90 = Rs 9,000 |
|---|---|
| New purchase | 100 units at Rs 110 = Rs 11,000 |
| New average cost | Rs 20,000 ÷ 200 = Rs 100 |
| Sale price | Rs 125 |
| True profit per unit | Rs 25 |
3. Bonus goods lower your cost
Free units received with a purchase add quantity without adding cost, so the average falls. Free units given away on a sale add cost without adding revenue, so the margin on that bill falls.
4. Discounts come off revenue
A discount is money you did not receive. Subtract it from the sale before calculating profit, not after.
5. Look at profit three ways
- By invoice — which bills made money
- By product — which items carry the business
- By customer — which customers are worth the credit you give
HisabMate
True profit in HisabMate
Cost and profit are worked out on every sale, automatically.
- Weighted average cost recalculated on every purchase
- Bonus cost counted in cost of goods
- Line discounts, bill discounts and tax on the same screen
- Profit and loss, profit by product, by customer and by invoice
- Period comparison on the dashboard
Questions
What is weighted average cost?
The value of all stock divided by the quantity in stock, recalculated after every purchase.
Why does my profit look different in software than in my register?
Usually because the register uses the latest purchase price, while software uses the average cost of what is actually in stock.
Roman Urdu
Sahi munafa kaise nikalein?
Har purchase ke baad stock ki average cost nikalein (kul maal ki qeemat ÷ kul quantity), discount sale se pehle minus karein, aur bonus maal ki cost shamil karein.
Average cost wala software?
HisabMate har purchase par weighted average cost dobara nikalta hai, aur product, customer aur invoice wise munafa dikhata hai.