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
