Which cost method values inventory at the average price?

Which cost method values inventory at the average price?

• A. Average cost
• B. FIFO
• C. LIFO
• D. Specific identification

Answer: (A)

Average cost method uses a weighted average price per unit for inventory. You compute the cost per unit by dividing the total cost of goods available for sale (beginning inventory plus purchases) by the total units available. That single average cost per unit is then applied to all units, so ending inventory is valued at this average price and cost of goods sold reflects the same average. This approach smooths price fluctuations over time. In contrast, FIFO assigns oldest costs to cost of sales and newer costs to ending inventory, LIFO assigns the newest costs to cost of sales, and specific identification matches the exact cost to each item.

Average cost method uses a weighted average price per unit for inventory. You compute the cost per unit by dividing the total cost of goods available for sale (beginning inventory plus purchases) by the total units available. That single average cost per unit is then applied to all units, so ending inventory is valued at this average price and cost of goods sold reflects the same average. This approach smooths price fluctuations over time.

In contrast, FIFO assigns oldest costs to cost of sales and newer costs to ending inventory, LIFO assigns the newest costs to cost of sales, and specific identification matches the exact cost to each item.