In case the company has a number of inventory items acquired during a particular period and having different prices, certain valuation methods has to be applied to calculate Cost of Goods Sold and value of the inventory remaining on hand. These methods are:
- FIFO (First-in-First-out)
- LIFO (Last-in-First-out)
- Average Price
- Exact price
Average Price
Applying Average price inventory valuation method, average cost price of all items is calculated and is applied to estimate Cost of Goods Sold.
The picture below demonstrates this principle:
- The company acquired 3 items acquired during July
- One item is sold
Applying Average price inventory valuation method average cots price of all items is calculated, i.e. we add up all the prices and divide by number of items.
- Therefore Cost of Goods Sold will amount to $101.7 – average cost of one item
- Cost of inventory on hand, i.e. cost of closing inventory, will amount to the cost of reamining 2 items, valued at the average price of $101.7, i.e . $203.4
Further explore also other inventory valuation methods:
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