Average cost method
Encyclopedia
Under the average cost method, it is assumed that the cost of inventory is based on the average cost of the goods available for sale during the period.
The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale. This gives a weighted-average unit cost that is applied to the units in the ending inventory.
There are two commonly used average cost methods: Simple Weighted-average cost method and moving-average cost method.
cost.
It is also known as AVCO
It takes Cost of Goods Available for Sale
and divides it by the total amount of goods from Beginning Inventory and Purchases. This gives a Weighted Average Cost per Unit. A physical count is then performed on the ending inventory to determine the amount of goods left. Finally, this amount is multiplied by Weighted Average Cost per Unit to give an estimate of ending inventory cost.
cost.
Assume that both Beginning Inventory and beginning inventory cost are known. From them the Cost per Unit of Beginning Inventory can be calculated. During the year, multiple purchases were made. Each time, purchase costs are added to beginning inventory cost to get Cost of Current Inventory. Similarly, the number of units bought is added to beginning inventory to get Current Goods Available for Sale. After each purchase, Cost of Current Inventory is divided by Current Goods Available for Sale to get Current Cost per Unit on Goods. Also during the year, multiple sale
s happened.
The Current Goods Available for Sale is deducted by the amount of goods sold, and the Cost of Current Inventory is deducted by the amount of goods sold times the latest (before this sale) Current Cost per Unit on Goods. This deducted amount is added to Cost of Goods Sold
.
At the end of the year, the last Cost per Unit on Goods, along with a physical count, is used to determine ending inventory cost.
The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale. This gives a weighted-average unit cost that is applied to the units in the ending inventory.
There are two commonly used average cost methods: Simple Weighted-average cost method and moving-average cost method.
Weighted Average Cost
Weighted Average Cost is a method of calculating Ending InventoryEnding Inventory
Ending inventory is the amount of inventory a company have in stock at the end of this fiscal year. It is closely related with ending inventory cost, which is the amount of money spent to get these goods in stock. It should be calculated at the lower of cost or market.-References:1...
cost.
It is also known as AVCO
It takes Cost of Goods Available for Sale
Cost of Goods Available for Sale
Cost of goods available for sale is the maximum amount of goods, or inventory, that a company can possibly sell during this fiscal year. It has the formula:...
and divides it by the total amount of goods from Beginning Inventory and Purchases. This gives a Weighted Average Cost per Unit. A physical count is then performed on the ending inventory to determine the amount of goods left. Finally, this amount is multiplied by Weighted Average Cost per Unit to give an estimate of ending inventory cost.
Moving-Average Cost
Moving-Average (Unit) Cost is a method of calculating Ending InventoryEnding Inventory
Ending inventory is the amount of inventory a company have in stock at the end of this fiscal year. It is closely related with ending inventory cost, which is the amount of money spent to get these goods in stock. It should be calculated at the lower of cost or market.-References:1...
cost.
Assume that both Beginning Inventory and beginning inventory cost are known. From them the Cost per Unit of Beginning Inventory can be calculated. During the year, multiple purchases were made. Each time, purchase costs are added to beginning inventory cost to get Cost of Current Inventory. Similarly, the number of units bought is added to beginning inventory to get Current Goods Available for Sale. After each purchase, Cost of Current Inventory is divided by Current Goods Available for Sale to get Current Cost per Unit on Goods. Also during the year, multiple sale
Sales
A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity....
s happened.
The Current Goods Available for Sale is deducted by the amount of goods sold, and the Cost of Current Inventory is deducted by the amount of goods sold times the latest (before this sale) Current Cost per Unit on Goods. This deducted amount is added to Cost of Goods Sold
Cost of goods sold
Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...
.
At the end of the year, the last Cost per Unit on Goods, along with a physical count, is used to determine ending inventory cost.
See also
- Inventory
- Weighted average cost
- Moving average cost
- FIFO and LIFO accountingFIFO and LIFO accountingFIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks....
- Specific identificationSpecific IdentificationSpecific identification is a method of finding out ending inventory cost.It requires a detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year end inventory...
- Income statementIncome statementIncome statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...