Using the given inventory data, what are the COGS and ending inventory under the average cost method?

Using the given inventory data, what are the COGS and ending inventory under the average cost method?

• A. COGS $600, Valuation $300
• B. COGS $700, Valuation $200
• C. COGS $500, Valuation $400
• D. COGS $400, Valuation $500

Answer: (A)

Under the average cost method, you establish one average cost per unit for everything available for sale during the period, then apply that cost to both units sold and units on hand. First, combine what you had at the start with what you purchased to get the total cost of goods available for sale, and count the total units available. Then compute the weighted average cost per unit: total cost divided by total units. Next, multiply that average cost per unit by the number of units sold to get COGS, and multiply it by the remaining units to get ending inventory. Using the data in the problem, the weighted average cost per unit leads to COGS of 600 and ending inventory of 300. This result reflects the single average cost applied uniformly to both sold and remaining units, which is what the average cost method does.

Under the average cost method, you establish one average cost per unit for everything available for sale during the period, then apply that cost to both units sold and units on hand.

First, combine what you had at the start with what you purchased to get the total cost of goods available for sale, and count the total units available. Then compute the weighted average cost per unit: total cost divided by total units.

Next, multiply that average cost per unit by the number of units sold to get COGS, and multiply it by the remaining units to get ending inventory.

Using the data in the problem, the weighted average cost per unit leads to COGS of 600 and ending inventory of 300. This result reflects the single average cost applied uniformly to both sold and remaining units, which is what the average cost method does.