Also known as Weighted Average Price method, this valuation method uses the average purchase price of all products currently in stock.
In this approach, the movements out are valuated against the average stock item price (while for FIFO/LIFO this is done against the value of the batch the items were retrieved from.) this method uses the actual value (quantity) in stock and the value (quantity) of the (new) batch.

On adding a batch, its value is added to the total value in stock. Then the average value is calculated by dividing this by the number of items in stock. However, due to rounding, the total value may no longer correspond with the average value times the number of items in stock.
If total stock value is not recalculated, it could result in a non-zero stock value while no products are in stock.

For example:

- Total stock value = 10 euro. Number of items in stock = 10

- Now a batch of 10 items with a total value of 9,95 is added.

- If no recalculation would be done, this would result in a stock value of
10 + 9.95 = 19.95 euro.

- The average price of total stock - 19,95/20 = 0.9975 which is rounded to 1 euro.

When you issue all the products (against 1 euro) it may result in a negative stock value of 0.05. Therefore a recalculation is required.

Hence, on recalculating, the stock value will be: 20 * 1 = 20,00 euro.

Hence, it is recommended that a more detailed scale should be defined for the average value in order to prevent these rounding differences as much as possible.

For example, if in the example above, the scale of the average value is defined as 4 digits, on recalculating the stock value, the rounding difference will not affect the stock value.

The recalculated stock value will now be 20* 0.9975 = 19.95