Weighted average cost (AVCO) method

One of the most commonly used cost formulas or methods of inventory valuation include Weighted average cost (AVCO) method. Cost of goods sold and value of inventory in hand under AVCO method is calculated using the following formula:

Formula

W. avg cost per unit = Total cost of inventory / No. of units in inventory

Application of AVCO Method

AVCO method can be applied in Perpetual Inventory System as well as in Periodic Inventory System. The following example will elaborate how AVCO method is applied to calculate the cost of goods sold and value of inventory in hand.

Example

On 1 June, XYZ Company had an opening balance of 80 units of inventory costing $25 per unit. During the month of June, XYZ Company made following transactions:

Purchases

  • 3 June – 280 units @ $30 per unit
  • 12 June – 480 units @ $40 per unit
  • 20 June – 180 units @ $35 per unit

Sales

  • 7 June – 180 units
  • 9 June – 150 units
  • 15 June – 200 units
  • 25 June – 350 units

Calculate the following using AVCO method of valuation:

a) Cost of goods sold for the month of June
b) Value of inventory as at 30 June

Answer

AVCO (Periodic System of Inventory)

Movement of Inventory (Units)

Opening inventory 80
Purchases (280 + 480 + 180) 940
Units available for sale 1020
Units sold (180 + 150 + 200 + 350) 880
Closing inventory 140

Cost of Goods Sold

Keeping the AVCO formula in mind, we need to work out the total cost and total number of units purchased during the period. Calculation is as follows:

Date Units Rate ($) Cost ($)
Opening inventory 1 Jun 80 25 2,000
1st procurement 3 Jun 280 30 8,400
2nd procurement 12 Jun 480 40 19,200
3rd procurement 20 Jun 180 35 6,300
1020 35,900

W. avg cost per unit = $35,900 / 1020 = $35.20

Cost of goods sold
= No. of units sold x W. avg cost per unit
= 880 x $35.20
= $30,976

Closing inventory
= No. of units in closing inventory x W. avg cost per unit
= 140 x $35.20
= $4,928

AVCO (Perpetual System of Inventory)

Date Purchases Sales Balance
Units @ $ Units @ $ Units @ $
1 Jun 80 25 2,000
3 Jun 280 30 8,400 360 28.9 10,400
7 Jun 180 28.9 5,200 180 28.9 5,200
9 Jun 150 28.9 4,334 30 28.9 866
12 Jun 480 40 19,200 510 39.3 20,066
15 Jun 200 39.3 7,860 310 39.3 12,206
20 Jun 180 35 6,300 490 37.8 18,506
25 Jun 350 37.8 13,230 140 37.8 5,276
30,624

Cost of goods sold = $30,624

Closing inventory = $5,276