Practice Quiz

CLEP Accounting

Category - Accounting

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The following widgets were available in inventory for sale during the year. As you can see, the cost was rising throughout the year:

Beginning Inventory: 5 units at $51
Purchase 1: 12 units at $53
Purchase 2: 15 units at $54
Purchase 3: 10 units at $63

The ending inventory was 10 units. Assuming the company uses the periodic system for inventory, what is the value of the inventory at year end using the average cost method?
  1. $500
  2. $510
  3. $630
  4. $540
  5. $555
Explanation
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:

(5 x $51) + (12 x $53) + (15 x $54) + (10 x $63) x 10 = $??
5 + 12 + 15 + 10
255 + 636 + 810 + 630 x 10 x 10 = $??
42

(2331/42) x 10 = $55.50 (average unit cost) x 10 (number on hand at year end) = $555.00.

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.
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