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BLOG: AVERAGE COST METHODWHAT IS AVERAGE COST METHOD AND HOWTO CALCULATE?
Definition and Objectives of Average Cost MethodThe average cost method is a method of calculating the cost of inventory. In order to calculatethe average cost of inventory, the total cost of inventory and number of items or units present inthe total inventory is considered. The average cost method is a process of assigning relevantcosts to each item in inventory at the time of selling such inventory item. Some businessorganisations choose to apply average method rather than using other inventory valuationmethods such as LIFO (last-in-fast-out) or FIFO (first-in-first-out) because average costmethoduses to minimise the drastic and sometimes negative effects of allocating costs on theinventory items on the basis of such item’s value on the date of purchase.The objective of using the average cost method for inventory valuation is to calculate the cost ofending inventory by using weighted-average cost per unit. It is applied for determining per unitcost of similar kinds of inventory items like identical electrical equipment in a hardware shop ortoy in a toy store. Since the inventory items are alike, companies become able to assign the samecost per unit. The two major objectives of average cost method include assisting a company tocalculate its inventory in a simple and easy manner and helping the company to compute incomefrom business accurately. This method also aimed to help a company to avoid manipulation inincome calculation and unnecessary complexities while calculating its inventory. Anotherobjective of average cost method is ensuring the company about the accuracy of inventory costand cost of goods sold both of which are highly significant for measuring a company’s actualincome for a specific financial period. Description and formula of Average Cost MethodA company that offers products and services to customers needs to deal with inventories. Acompany offers products to the final customers by either purchasing the same from one of twomanufacturers of the products or produced by it. The items of inventory a company uses to sellout must be recorded on the income statement of the company asCOGS (Cost of Goods Sold).Cost of Goods Sold is a fundamental element for companies, investors, and trade analysts

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