Under AVCO, which price is used to value both inventory and cost of goods sold?

Under AVCO, which price is used to value both inventory and cost of goods sold?

• A. Last purchase price
• B. Average price
• C. First purchase price
• D. Highest price

Answer: (B)

Under AVCO, the price used is the average cost per unit (the weighted average of all costs available for sale). This single average cost is applied to both the inventory on hand and the cost of goods sold, giving a consistent valuation for both. The idea is to blend all costs in the period into one representative cost per unit, so price fluctuations don’t cause different costs to be recorded for inventory and COGS. For example, if you start with 20 units at $5 and then purchase 30 more at $7, the total cost is 310 for 50 units, so the average cost per unit is $6.20. If you sell 25 units, COGS = 25 × 6.20 = $155, and the ending inventory is 25 × 6.20 = $155. This demonstrates how both COGS and inventory use the same average price. Using the most recent cost would tie COGS to the latest purchase, while using the oldest would tie it to the earliest; neither reflects the blended cost of all units available, which is why AVCO uses the average price.

Under AVCO, the price used is the average cost per unit (the weighted average of all costs available for sale). This single average cost is applied to both the inventory on hand and the cost of goods sold, giving a consistent valuation for both. The idea is to blend all costs in the period into one representative cost per unit, so price fluctuations don’t cause different costs to be recorded for inventory and COGS.

For example, if you start with 20 units at $5 and then purchase 30 more at $7, the total cost is 310 for 50 units, so the average cost per unit is $6.20. If you sell 25 units, COGS = 25 × 6.20 = $155, and the ending inventory is 25 × 6.20 = $155. This demonstrates how both COGS and inventory use the same average price.

Using the most recent cost would tie COGS to the latest purchase, while using the oldest would tie it to the earliest; neither reflects the blended cost of all units available, which is why AVCO uses the average price.