# 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.

### 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

Written by Irfanullah Jan