what is average cost method 
average cost method assigns a cost to inventory items based on the total cost of goods purchased or produced in a period divided by the total number of items purchased or produced average cost method is also known as weighted average method eliana rodgers investopediaunderstanding average cost methodbusinesses that sell products to customers have to deal with inventory which is either bought from a separate manufacturer or produced by the company itself items previously in inventory that are sold off are recorded on a company s income statement as cost of goods sold cogs cogs is an important figure for businesses investors and analysts as it is subtracted from sales revenue to determine gross margin on the income statement to calculate the total cost of goods sold to consumers during a period different companies use one of three inventory cost methods average cost method uses a simple average of all similar items in inventory regardless of purchase date followed by a count of final inventory items at the end of an accounting period multiplying the average cost per item by the final inventory count gives the company a figure for the cost of goods available for sale at that point the same average cost is also applied to the number of items sold in the previous accounting period to determine the cogs example of average cost methodfor example consider the following inventory ledger for sam s electronics assume the company sold 72 units in the first quarter the weighted average cost is the total inventory purchased in the quarter 113 300 divided by the total inventory count from the quarter 100 for an average of 1 133 per unit the cost of goods sold cogs will be recorded as 72 units sold 1 133 average cost 81 576 the cost of goods available for sale or inventory at the end of the period will be the 28 remaining items still in inventory 1 133 31 724 benefits of average cost methodaverage cost method requires minimal labor to apply and is therefore the least expensive of all the methods in addition to the simplicity of applying average cost method income cannot be as easily manipulated as other inventory costing methods companies that sell products that are indistinguishable from each other or that find it difficult to find the cost associated with individual units will prefer to use average cost method this also helps when there are large volumes of similar items moving through inventory making it time consuming to track each individual item special considerationsone of the core aspects of u s generally accepted accounting principles gaap is consistency the consistency principle requires a company to adopt an accounting method and follow it consistently from one accounting period to another for example businesses that adopt average cost method need to continue to use this method for future accounting periods this principle is in place for the ease of financial statement users so that figures on the financials can be compared year over year a company that changes its inventory costing method must highlight the change in its footnotes to the financial statements and apply the same method retroactively to prior period comparative financial statements 1