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 CostTotal 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 1Beginning Inventory60 units @ $15.00 per unit
5Purchase140 units @ $15.50 per unit
14Sale190 units @ $19.00 per unit
27Purchase70 units @ $16.00 per unit
29Sale30 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 CostUnitsUnit CostTotal
Mar 1 Inventory60$15.00$900
Mar 5 Purchase140$15.50$2,170
27 Purchase70$16.00$1,120
 270* $15.52$4,190
* $4,190 ÷ 270   
    
Cost of Goods Sold220$15.52$3,414
Ending Inventory50$15.52$776

AVCO Perpetual

DatePurchasesSalesBalance
UnitsUnit CostTotalUnitsUnit CostTotalUnitsUnit CostTotal
Mar 1      60$15.00$900
5140$15.50$2,170   60$15.00$900
       140$15.50$2,170
       200$15.35$3,070
14   190$15.35$2,91610$15.35$154
2770$16.00$1,190   10$15.35$154
       70$16.00$1,120
       80$15.92$1,274
29   30$15.92$47850$15.92$796
31      50$15.92$796

Written by Irfanullah Jan