The average cost method, relative to FIFO or LIFO, tends to be perceived as a simplistic compromise between the other two inventory accounting methods. With that being said, the weighted average approach implies that each product cost receives equal treatment and that the inventory costs are spread evenly, irrespective of the date of purchase or actual production. Step 2 → In the next step, all of the costs of production are added together and the sum is subsequently divided by the total number of items produced by the company.Step 1 → The first step is to identify each cost of production incurred in a specified period and the ascribed dollar value.The process of calculating the average cost method for inventory recognition is a two-step process. The average cost method utilizes a weighted average calculation as a compromise between FIFO and LIFO. the most recent inventory purchases are assumed as being the first to be sold and are what are recognized first in COGS. LIFO → LIFO is an abbreviation for “Last In, First Out.” Unlike FIFO, LIFO recognizes the most recent purchases of inventories before those purchased earlier, i.e.FIFO → FIFO is an abbreviation for “First In, First Out.” Under the FIFO approach of inventory accounting, the inventory purchased on an earlier date is recognized first and recorded on the income statement as an expense within the cost of goods sold (COGS) line item.
The average cost method, or the “weighted-average method”, is one of the most commonly-used inventory accounting recording policies, only trailing behind FIFO and LIFO. The Average Cost Method assigns inventory costs using a weighted average approach, wherein the costs of production are added and divided by the number of items produced.Īverage Cost Method for Inventory Accounting
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