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What is the Moving Average Price Inventory Valuation?

Published in Inventory Valuation 3 mins read

The moving average price inventory valuation method is a way to calculate the cost of goods sold (COGS) and ending inventory by using a weighted average cost for each item. This method assumes that all inventory items are identical and are purchased at various prices over time.

Here's how the moving average price method works:

  1. Calculate the weighted average cost: This is done by dividing the total cost of goods available for sale by the total number of units available for sale. The total cost of goods available for sale includes beginning inventory and purchases.
  2. Apply the weighted average cost to calculate COGS: This is done by multiplying the weighted average cost by the number of units sold.
  3. Calculate ending inventory: This is done by multiplying the weighted average cost by the number of units remaining in inventory.

Example:

Let's say a company has the following inventory transactions:

  • Beginning inventory: 100 units at $10 per unit
  • Purchase 1: 200 units at $12 per unit
  • Purchase 2: 150 units at $14 per unit
  • Sales: 300 units

Calculating the weighted average cost:

  • Total cost of goods available for sale: (100 units x $10) + (200 units x $12) + (150 units x $14) = $5,600
  • Total units available for sale: 100 + 200 + 150 = 450 units
  • Weighted average cost: $5,600 / 450 units = $12.44 per unit

Calculating COGS:

  • COGS: 300 units x $12.44 = $3,732

Calculating ending inventory:

  • Ending inventory: (450 units - 300 units) x $12.44 = $1,866

Advantages of the Moving Average Price Method:

  • Simpler than the FIFO and LIFO methods: It's less complex to calculate.
  • More accurate than the FIFO and LIFO methods: It reflects the actual cost of goods sold more accurately, especially when inventory prices fluctuate.
  • Easier to manage: It's easier to track and update the weighted average cost as new inventory is purchased.

Disadvantages of the Moving Average Price Method:

  • Not as accurate as the FIFO and LIFO methods: It doesn't consider the actual flow of goods in and out of inventory.
  • Can be misleading: It can result in a distorted picture of inventory costs if there are significant price fluctuations.

When to Use the Moving Average Price Method:

The moving average price method is generally suitable for businesses that:

  • Have a large volume of inventory transactions.
  • Purchase inventory at various prices.
  • Do not want to track the specific cost of each inventory item.

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