CPA Accountant Review Questions

Answer: E - The value of the inventory at year end, using the average cost method, is $555. This is found by finding the average cost per unit:

Average cost per unit = total price of units / number of units

= [(5 x $51) + (12 x $53) + (15 x $54) + (10 x $63)] / 42
= (255 + 636 + 810 + 630) / 42
= 2331 / 42 = 55.5

Value of inventory = average cost per unit x number of units in inventory

= 55.5 x 10
= 555

Key Takeaway: Under the average cost method, the cost flows are averaged for the period. The cost of the beginning inventory is added to the total cost of the purchases made during the period. The sum is divided by the number of units in beginning inventory and purchases to arrive at an average per unit cost. This per unit cost is multiplied by the number of units in ending inventory to determine the amount of ending inventory.