Average Daily Trading Volume (ADTV): Definition, How To Use It
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Average Daily Trading Volume (ADTV)
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Posts Tagged ‘Average’
Average Selling Price (ASP): Definition, Calculation and Examples
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What Is Average Selling Price (ASP)?
The term average selling price (ASP) refers to the price at which a certain class of good or service is typically sold. The average selling price is affected by the type of product and the product life cycle. The ASP is the average selling price of the product across multiple distribution channels, across a product category within a company, or even across the market as a whole.
Key Takeaways
- The term average selling price refers to the price at which a certain class of good or service is typically sold.
- ASPs can serve as a benchmark for entities who want to set a price for their product or service.
- Computers, cameras, televisions, and jewelry tend to have higher ASPs, while books and DVDs have a low average selling price.
- Average selling price is affected by the type of product and the product life cycle.
- Average selling price is usually reported during quarterly financial results.
Understanding Average Selling Price (ASP)
The average selling price is the price for a product or service in various markets, and is normally used in the retail and technology industries. The established ASP for a particular good can act as a benchmark price, helping other manufacturers, producers, or retailers set the prices for their own products.
Marketers who try to set a price for a product must also consider where they want their product to be positioned. If they want their product image to be part of a high-quality choice, they have to set a higher ASP.
Products like computers, cameras, televisions, and jewelry tend to have higher average selling prices while products like books and DVDs will have a low average selling price. When a product is the latter part of its product life cycle, the market is most likely saturated with competitors, therefore, driving down the ASP.
In order to calculate the ASP, divide the total revenue earned from the product by the total number of units sold. This average selling price is usually reported during quarterly financial results and can be considered as accurate as possible given regulation on fraudulent reporting.
Special Considerations
The smartphone market is a big industry which uses average selling prices. In the smartphone market, the average selling price indicates how much money a handset manufacturer is receiving on average for the phones that it sells.
In the smartphone market, advertised selling prices can differ drastically from average selling prices.
In the smartphone market, advertised selling prices can differ drastically from average selling prices.
For product-driven companies like Apple, calculations for average selling price provide pivotal information about its financial performance and, by extension, the performance of its stock price. In fact, there’s a clear relationship between Apple’s iPhone ASP and its stock price movements.
The iPhone’s ASP matters even more when considering how each device drives overall profitability for Apple. Apple consolidates its operations under a single profit-and-loss statement (P&L), meaning investors can’t tell how costs, such as marketing and research and development (R&D) are spread among the company’s various products.
Since the iPhone has the highest gross margin in Apple’s device family, the device generates the lion’s share of Apple’s profits. That makes the iPhone crucial in determining Apple’s overall financial performance each quarter.
Examples of Average Selling Price
The term average selling price has a place in the housing market. When the average selling price of a home within a particular region rises, this may be a signal of a booming market. Conversely, when the average price drops, so does the perception of the market in that particular area.
Some industries use ASP in a slightly different way. The hospitality industry—especially hotels and other lodging companies—commonly refers to it as the average room or average daily rate. These average rates tend to be higher during peak seasons, while rates normally drop when travel seems to be low or during off-seasons.
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Average Cost Method: Definition and Formula with Example
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What Is Average Cost Method?
Average cost method assigns a cost to inventory items based on the total cost of goods purchased or produced in a period divided by the total number of items purchased or produced. Average cost method is also known as weighted-average method.
Key Takeaways
- Average cost method is one of three inventory valuation methods, with the other two common methods being first in, first out (FIFO) and last in, first out (LIFO).
- Average cost method uses the weighted average of all inventory purchased in a period to assign value to the cost of goods sold (COGS) as well as the cost of goods still available for sale.
- Once a company selects an inventory valuation method, it needs to remain consistent in its use to be compliant with generally accepted accounting principles (GAAP).
Click Play to Learn What the Average Cost Method Is
Understanding the Average Cost Method
Businesses that sell products to customers have to deal with inventory, which is either bought from a separate manufacturer or produced by the company itself. Items previously in inventory that are sold off are recorded on a company’s income statement as cost of goods sold (COGS). COGS is an important figure for businesses, investors, and analysts as it is subtracted from sales revenue to determine gross margin on the income statement. To calculate the total cost of goods sold to consumers during a period, different companies use one of three inventory cost methods:
Average cost method uses a simple average of all similar items in inventory, regardless of purchase date, followed by a count of final inventory items at the end of an accounting period. Multiplying the average cost per item by the final inventory count gives the company a figure for the cost of goods available for sale at that point. The same average cost is also applied to the number of items sold in the previous accounting period to determine the COGS.
Example of Average Cost Method
For example, consider the following inventory ledger for Sam’s Electronics:
| Purchase date | Number of items | Cost per unit | Total cost |
| 1/1 | 20 | $1,000 | $20,000 |
| 1/18 | 15 | $1,020 | $15,300 |
| 2/10 | 30 | $1,050 | $31,500 |
| 2/20 | 10 | $1,200 | $12,000 |
| 3/5 | 25 | $1,380 | $34,500 |
| Total | 100 | $113,300 |
Assume the company sold 72 units in the first quarter. The weighted-average cost is the total inventory purchased in the quarter, $113,300, divided by the total inventory count from the quarter, 100, for an average of $1,133 per unit. The cost of goods sold (COGS) will be recorded as 72 units sold × $1,133 average cost = $81,576. The cost of goods available for sale, or inventory at the end of the period, will be the 28 remaining items still in inventory × $1,133 = $31,724.
Benefits of Average Cost Method
Average cost method requires minimal labor to apply and is, therefore, the least expensive of all the methods. In addition to the simplicity of applying average cost method, income cannot be as easily manipulated as other inventory-costing methods. Companies that sell products that are indistinguishable from each other or that find it difficult to find the cost associated with individual units will prefer to use average cost method. This also helps when there are large volumes of similar items moving through inventory, making it time-consuming to track each individual item.
Special Considerations
One of the core aspects of U.S. generally accepted accounting principles (GAAP) is consistency. The consistency principle requires a company to adopt an accounting method and follow it consistently from one accounting period to another.
For example, businesses that adopt average cost method need to continue to use this method for future accounting periods. This principle is in place for the ease of financial statement users so that figures on the financials can be compared year over year. A company that changes its inventory-costing method must highlight the change in its footnotes to the financial statements and apply the same method retroactively to prior period-comparative financial statements.
What is the average cost method formula?
The average cost method formula is calculated as:
Total Cost of Goods Purchased or Produced in Period ÷ Total Number of Items Purchased or Produced in Period = Average Cost for Period
The result can then be applied to both the cost of goods sold (COGS) and the cost of goods still held in inventory at the end of the period.
Why should I use average cost method?
Average cost method is a simple inventory valuation method, especially for businesses with large volumes of similar inventory items. Instead of tracking each individual item throughout the period, the weighted average can be applied across all similar items at the end of the period.
What inventory cost methods are acceptable under generally accepted accounting principles (GAAP)?
GAAP allows for last in, first out (LIFO), first in, first out (FIFO), or average cost method of inventory valuation. On the other hand, International Financial Reporting Standards (IFRS) do not allow LIFO because it does not typically represent the actual flow of inventory through a business.
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Average Daily Balance Method: Definition and Calculation
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What is the Average Daily Balance Method?
The average daily balance is a common accounting method that calculates interest charges by considering the balance invested or owed at the end of each day of the billing period, rather than the balance invested or owed at the end of the week, month, or year.
Key Takeaways
- Interest charges are calculated using the total amount due at the end of each day.
- The average daily balance credits a customer’s account from the day the credit card company receives a payment.
- Interest charges using the average daily balance method should be lower than the previous balance method and higher than the less common adjusted balance method.
Understanding the Average Daily Balance Method
The federal Truth-In-Lending-Act (TILA) requires lenders to disclose their method of calculating finance charges, as well as annual percentage rates (APR), fees, and other terms, in their terms and conditions statement. Providing these details makes it easier to compare different credit cards.
TILA permits the interest owed on credit card balances to be calculated in various different ways. The most common methods are:
- Average daily balance method: Uses the balance on each day of the billing cycle, rather than an average balance throughout the billing cycle, to calculate finance charges.
- Previous balance method: Interest charges are based on the amount owed at the beginning of the previous month’s billing cycle.
- Adjusted balance method: Bases finance charges on the amount(s) owed at the end of the current billing cycle after credits and payments have been posted.
Important
An investor must understand how an institution’s choice of accounting methods used to calculate interest affect the amount of interest deposited into his or her account.
How the Average Daily Balance Method Works
The average daily balance totals each day’s balance for the billing cycle and divides by the total number of days in the billing cycle. Then, the balance is multiplied by the monthly interest rate to assess the customer’s finance charge—dividing the cardholder’s APR by 12 calculates the monthly interest rate. However, if the lender or card issuer uses a method that compounds interest daily, the interest associated with the day’s ending balance gets added to the next day’s beginning balance. This will result in higher interest charges and the reader should confirm which method is being used.
The average daily balance credits a customer’s account from the day the credit card company receives a payment. To assess the balance due, the credit card issuer sums the beginning balance for each day in the billing period and subtracts any payments as they arrive and any credits made to the customer’s account that day.
Cash advances are usually included in the average daily balance. The total balance due may fluctuate daily because of payments and purchases.
Average Daily Balance Method Example
A credit card has a monthly interest rate of 1.5 percent, and the previous balance is $500. On the 15th day of a billing cycle, the credit card company receives and credits a customer’s payment of $300. On the 18th day, the customer makes a $100 purchase.
The average daily balance is ((14 x 500) + (3 x 200) + (13 x 300)) / 30 = (7,000 + 600 + 3,900) / 30 = 383.33. The bigger the payment a customer pays and the earlier in the billing cycle the customer makes a payment, the lower the finance charges assessed. The denominator, 30 in this example, will vary based on the number of days in the billing cycle for a given month.
Average Daily Balance Method Vs. Adjusted Balance Method Vs. Previous Balance Method
Interest charges using the average daily balance method should be lower than the previous balance method, which charges interest based on the amount of debt carried over from the previous billing cycle to the new billing cycle. On the other hand, the average daily balance method will likely incur higher interest charges than the adjusted balance method because the latter bases finance charges on the current billing period’s ending balance.
Card issuers use the adjusted balance method much less frequently than either the average daily balance method or the previous balance method.
Special Considerations
Some credit card companies previously used the double-cycle billing method, assessing a customer’s average daily balance over the last two billing cycles.
Double-cycle billing can add a significant amount of interest charges to customers whose average balance varies greatly from month to month. The Credit CARD Act of 2009 banned double-cycle billing on credit cards.
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