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Method Of Product Average Cost-Understanding And Benefits

Method Of Product Average Cost-Understanding And Benefits
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Before elaborating on the product average cost method-understanding and benefits, it is good to know in advance about the understanding of the company's financial statements, where one of the reporting methods used in this average cost method.

Understanding of Financial Statements

A financial statement is a report showing the financial condition of a company in a certain period. Information about the financial condition can later be used by stakeholders in the company such as management, lenders, investors, and shareholders to assess the performance of the company and determine what steps will be taken later.

What is the Average Cost Method?

The average cost method is a method that sets the cost for each inventory item based on the total cost of goods purchased or manufactured in a given period divided by the number of items purchased or manufactured in that period. The average cost method is also known as a weighted average method.

Understanding the Average Cost Method

An attempt or business that sells products to its customers certainly has to deal with the name of the supplies, either purchased from the manufacturer separately or manufactured by the company itself.

The previous Item in the inventory sold was then recorded on the company's income statement as the cost of goods sold. The cost of sales is one of the essentials for businesses, investors, and analysts because it is deducted from the sales revenue to determine the gross margin of the company's income statement.

To calculate the total cost of goods sold to consumers during a certain period, usually, the company uses one of three methods of inventory costs, namely:
  • First In First Out method (FIFO)
  • Last In First Out method (LIFO)
  • Average Cost method
The Average costing method uses a simple calculation of all similar items that exist in the inventory, regardless of when the time and date of the purchase, followed by the number of inventory end items at the end of the accounting period.

Multiplying the average cost per item with the final inventory amount gave the company a number for the cost of the goods available for sale at the time. The same fee also applies to the number of items sold in the previous accounting period to determine the cost of goods sold.

Example of an Average Cost Method

For example, please see the following calculation:
  • We assume your company sells as many as 72 units in the first quarter. The weighted average cost is the total inventory purchased in the first quarter, amounting to Rp. 100 million, divided by the total number of inventories from the first quarter, 100, so that the average get Rp. 1 million per unit.
  • The cost of goods sold is recorded as 72 units sold x Rp. 1 million Average costs = Rp. 72 million. The cost of goods available for sale, or inventory at the end of the period, will be the remaining 28 items still in stock x Rp. 1 million = Rp. 28 million
Benefits of the Average Cost Method

One of the benefits of implementing an average costing method is that it only requires minimal labor to implement it, so this method is the least inexpensive method of all the above methods.

In addition to being easy and simple in implementing these average cost methods, company revenue cannot be easily manipulated as with any other inventory costing method. Companies that sell products that cannot be distinguished from each other or that find it difficult to find the costs associated with individual units would prefer to use an average costing method.

The average method can also be helpful when there is a large volume of similar items moving through inventory, so it takes a lot of time to track the movements and usage of each of these items.

Special Considerations

One of the core aspects of the accounting principles adopted by the United States is generally accepted is consistency. The principle of consistency requires a company to adopt an accounting method and follow it consistently from one accounting period to another. For example, businesses that adopt an average cost method should continue to use this method for future accounting periods.

This principle is to provide convenience for users of financial statements so that the figures on finances can be compared from year to year. A company that changes inventory costing methods should highlight changes in footnotes to its financial statements.

Which method is the most widely used?

That is an article about the method of product average cost-understanding and benefits. Hopefully it will be useful for you.

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