Average Cost

The average cost method is just what it sounds like. It uses the beginning inventory balance and the purchases over the period to determine an average cost per unit. That average cost per unit is then used to determine both the CoGS and the ending inventory balance.

[Beginning Inventory + Purchases (in tk)]
÷ [Beginning Inventory + Purchases (in units)]
= Average Cost per Unit

Average Cost per Unit x Units Sold = Cost of Goods Sold

Avgerage Cost per Unit x Units in Ending Inventory = Ending Inventory Balance

EXAMPLE (CONTINUED): Under the average cost method, Maggie’s average cost per shirt for April is calculated as follows:

Beginning Inventory: 50 shirts (tk3/shirt)
Purchases: 100 shirts (60 at tk3/shirt and 40 at tk3.50/shirt)

Her total units available for sale over the period is 150 shirts. Her total Cost of Goods Available for Sale is tk470 (110 shirts at tk3 each and 40 at tk3.50 each).

Maggie’s average cost per shirt = tk470/150 = tk3.13

Using an average cost/shirt of tk3.13, we can calculate the following:

• CoGS in April = tk313 (100 shirts x tk3.13/shirt)
• Ending Inventory = tk157 (50 shirts x tk3.13/shirt)