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    sonyag1979's Avatar
    sonyag1979 Posts: 3, Reputation: 1
    New Member
    		  
    #1

    Feb 21, 2007, 06:15 PM
    Cost of end. Inv. And cost of goods sold under average cost
    It's me again!
    I have another question to the same problem. In case someone else responds, I'll post the problem again.

    June 1 inv
    200
    5
    1000
    June 12 purch.
    300
    6
    1800
    June 23 purch.
    500
    7
    3500
    June 30 inv.
    I need to compute the cost of the ending inventory and the cost of goods sold using the average cost method.
    Will the results be higher or lower than the results under FIFO & LIFO? And why is the average unit cost not $6.00
    Please explain how to get the answer and why it's that way.

    Thanks in advance.
    adiwsusanto's Avatar
    adiwsusanto Posts: 5, Reputation: 1
    New Member
    		  
    #2

    Mar 12, 2008, 02:59 AM
    The Average method is actually a "weighted" average method, meaning you have to divide the total value (quantity x unit cost) with the total quantity instead of just adding the 3 prices (5+6+7) & divide by 3.

    Using the Avg method, your unit cost is then (1000+1800+3500)/ (200+300+500) = 6.3

    Well, you didn't mention what's your inventory balance at 30June. Yet, if you understand the concept that FIFO means that your inventory balance will be based on the LATEST unit cost while LIFO means that your inventory balance will be based on the EARLIEST unit cost . Since the price is going up (from 5 to 6 then to 7), then using FIFO, you will have higher UNIT COST, this lower inventory value, using LIFO you have lower UNIT COST and using average somewhere in between.
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