Parts Costing Explained: Weighted Average Cost for Workshops

You have six of the same filter on the shelf. You did not buy them at the same time and you did not pay the same price.

Two came in during March at £8.40. Four came in last week at £9.10, because everything went up. A job this morning uses one. What did that filter cost you?

It is a genuinely interesting question and most workshops have never had to answer it, because the cost was never recorded against the job in the first place. Once you do start recording it, the question arrives immediately and it needs a consistent answer, otherwise your margin figures are whatever the last person decided.

This post is the answer, in plain terms, and why the detail underneath it protects you.

Three answers, two of them wrong for a workshop

"The oldest one, £8.40." This is FIFO, first in first out, and it is a perfectly respectable accounting method. It is also a nuisance in a parts bin, because it requires you to know which physical filter you picked up. Nobody in a workshop is tracking which of six identical filters came in which week, and any system that claims they are is describing a fantasy.

"The newest one, £9.10." Tempting, because it feels prudent, and it is what most people guess. But it means a delivery at a high price instantly makes every filter on your shelf expensive, including the two you got cheaply, and your reported margin drops on parts you bought well. It flatters nothing and it distorts the month.

"An average of what you actually paid." Two at £8.40 plus four at £9.10 is £50.20 for six, which is £8.37 each. This is weighted average cost, and it is the sensible answer for a workshop, because it does not require you to identify individual parts and it reflects what the shelf as a whole genuinely cost you.

Vehiso uses the third. Every time a delivery is booked in, the average is recalculated from what was actually paid, per part, per branch. The number is not a list price, not an estimate and not what the part cost the last time. It is what your money actually bought.

Why "per branch" is in that sentence

Because two sites do not buy the same way.

One branch has a better arrangement with a factor, or buys in bigger quantities, or is closer to a different supplier. If their costs were pooled into one company-wide average, each branch's parts margin would be wrong, and the branch that buys well would be quietly subsidising the one that does not in the reporting.

So the catalogue is shared and the cost is not. That is part of a wider set of decisions covered in two branches, one shelf.

The bit that matters most: your margin should not move

Here is the scenario that catches people out, and it is the real reason to care about any of this.

A job completes on Monday using that filter at £8.37. Parts margin on the job is calculated, the invoice goes out, the month's figures include it.

On Wednesday, a delivery of ten arrives at £11.00, because there is a supply problem. The weighted average jumps.

What should happen to Monday's job?

Nothing. Absolutely nothing. Monday's job used a filter that cost £8.37 at the time, the customer paid what they paid, and the margin you made on that job is a historical fact. If a Wednesday delivery could reach back and change Monday's margin, then no report you ever run is stable, last month's figures change depending on when you look at them, and you can never close a period.

So the cost is stamped onto the job card line at the moment the part is issued, which is when the job is completed. After that it is fixed. The new delivery changes the average for parts issued from then on, and it changes nothing that has already happened.

Say that back in the language that matters: your parts margin does not move retroactively. Last month's number is still last month's number when you look at it in March.

The sequence, in order

Worth laying out because the order is the point.

The advisor adds the part to the job. It is reserved for that job, so nobody else can promise it. No cost is fixed yet, because the part has not left the shelf.
The job is completed. The part is issued. The current weighted average cost is written onto the line and stays there.
The invoice is produced. Sell price minus the stamped cost is the parts gross profit on that line.
A later delivery arrives at a different price. The average moves. Steps 1 to 3 for future jobs use the new figure. Nothing already issued changes.

Between steps 1 and 2 there is a gap, sometimes days, and it is the right gap. A part that is promised has not cost you anything yet in margin terms. A part that has gone onto the car has.

What to call it in front of a customer or a technician

Almost never "weighted average cost".

It is the right term for your accountant and it belongs in an FAQ and on a spec sheet. In the workshop, the useful phrasing is "what we paid for it", and for the report line it is "parts cost". The precision is doing its work underneath whether anyone says the words or not.

Keep one definition straight, though, because somebody will eventually ask. Parts gross profit is the sell price minus the cost stamped on the line. It does not include carriage, it does not include the labour to fit the part, and it carries no share of your overhead. It is the margin on the part, which is the number that has been missing, not the profit of the business.

If you hold no stock at all

Then there is no average, and the question in this post never arises for you.

A part bought per job for that job has exactly one cost: what the factor charged you that morning. You record it on the line, and your margin is the straightforward subtraction. That is the version most workshops should start with, and it is covered in you do not need a stores man to know what parts make you.

Weighted average is what happens when you hold six of something. It is not a step you have to take on the way in.