Average Cost (AVCO) Method

http://accountingexplained.com/financial/inventories/avco-method

 

Average Cost (AVCO) Method

 

Average cost method (AVCO) calculates the cost of ending inventory and cost of goods sold for a period on the basis of weighted average cost per unit of inventory. Weighted average cost per unit is calculated using the following formula:

Weighted Average	=	Total Cost of Inventory
Unit Cost		Total Units in Inventory

Like FIFO and LIFO methods, AVCO is also applied differently in periodic inventory system and perpetual inventory system. In periodic inventory system, weighted average cost per unit is calculated for the entire class of inventory. It is then multiplied with number of units sold and number of units in ending inventory to arrive at cost of goods sold and value of ending inventory respectively. In perpetual inventory system, we have to calculate the weighted average cost per unit before each sale transaction.

The calculation of inventory value under average cost method is explained with the help of the following example:

Example

Apply AVCO method of inventory valuation on the following information, first in periodic inventory system and then in perpetual inventory system to determine the value of inventory on hand on Mar 31 and cost of goods sold during March.

Mar 1	Beginning Inventory	60 units @ $15.00 per unit
5	Purchase	140 units @ $15.50 per unit
14	Sale	190 units @ $19.00 per unit
27	Purchase	70 units @ $16.00 per unit
29	Sale	30 units @ $19.50 per unit

Solution

AVCO Periodic

Units Available for Sale	= 60 + 140 + 70		= 270
Units Sold	= 190 + 30		= 220
Units in Ending Inventory	= 270 − 220		= 50
Weighted Average Unit Cost	Units	Unit Cost	Total
Mar 1 Inventory	60	$15.00	$900
Mar 5 Purchase	140	$15.50	$2,170
27 Purchase	70	$16.00	$1,120
	270	* $15.52	$4,190
* $4,190 ÷ 270
Cost of Goods Sold	220	$15.52	$3,414
Ending Inventory	50	$15.52	$776

AVCO Perpetual

Date	Purchases			Sales			Balance
	Units	Unit Cost	Total	Units	Unit Cost	Total	Units	Unit Cost	Total
Mar 1							60	$15.00	$900
5	140	$15.50	$2,170				60	$15.00	$900
							140	$15.50	$2,170
							200	$15.35	$3,070
14				190	$15.35	$2,916	10	$15.35	$154
27	70	$16.00	$1,190				10	$15.35	$154
							70	$16.00	$1,120
							80	$15.92	$1,274
29				30	$15.92	$478	50	$15.92	$796
31							50	$15.92	$796