The Average Cost Method: Definition, Objectives, and Calculation

This blog post provides a comprehensive overview of the average cost method used in inventory valuation. It begins by defining the average cost method as a way to compute the cost of inventory items based on the average cost of all similar items. The post outlines the objectives of the method, including simplifying inventory calculation, ensuring accurate income computation, and avoiding manipulation. It details the formula for calculating the average cost and compares it with other inventory costing methods like FIFO and LIFO, highlighting its advantages in terms of simplicity, suitability for indistinguishable products, and automatic price fluctuation adjustment. The post includes a step-by-step example of how to calculate the weighted average cost and demonstrates its application in determining the cost of goods sold and ending inventory. Finally, it discusses the benefits of the average cost method, such as its simplicity in record-keeping and its ability to eliminate the task of separating inventory items.