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
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 to ...
method and
perpetual weighted-average cost
Perpetual, meaning "eternal", may refer to:
Christianity
* Perpetual curacy, a type of Christian priesthood in Anglicanism
* Perpetual virginity of Mary, one of the four Marian dogmas in Catholicism
Finance
*Perpetual bond, a bond that pay ...
method.
Weighted average cost
Weighted average cost is a method of calculating
ending inventory cost. It can also be referred to as "WAVCO".
It takes
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 an accounting period. It has the formula:{{Cite book , url=https://www.worldcat.org/oclc/81601239 , title=Intermediate accounting ...
and divides it by the number of units available for sale (number of goods from
beginning inventory
An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial ...
+
purchase
Purchasing is the process a business or organization uses to acquire goods or services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between ...
s/production). This gives a weighted average cost per unit. A physical count is then performed on the ending inventory to determine the number of goods left. Finally, this quantity is multiplied by weighted average cost per unit to give an estimate of ending inventory cost. The cost of goods sold valuation is the amount of goods sold times the weighted average cost per unit. The sum of these two amounts (less a rounding error) equals the total actual cost of all purchases and beginning inventory.
Moving-average cost
Moving-average (unit) cost is a method of calculating ending inventory 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 are 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
sales happen. 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 (COGS) is the carrying value of goods sold during a particular period.
Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), 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
*
FIFO and LIFO accounting
FIFO and LIFO accounting are methods used in managing inventory and financial matters involving the amount of money a company has to have tied up within inventory of produced goods, raw materials, parts, components, or feedstocks. They are used to ...
*
Income statement
An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
*
Inventory
*
Specific identification
Specific 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 good bought on specific dates comprise the year-end inventory. When this inform ...
References
* Intermediate Accounting 8th Canadian Edition, page 447, Kieso, Weygandt, Warfield, Young, Wiecek, John Wiley & Sons Canada, Ltd, 2007,
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Accounting systems
Inventory
Management accounting