ASAccountingCambridge (CIE)Revision NotesCost and Management AccountingMaterial & Labour CostsAVCO (Weighted Average Cost) Method

AVCO (Weighted Average Cost) Method (Cambridge (CIE) AS Accounting): Revision Note

Exam code: 9706

Seina Murakami

Written by: Seina Murakami

Reviewed by: Dan Finlay

Updated on

AVCO method

What is the AVCO method?

  • The AVCO method is an inventory valuation method that calculates the average cost of each unit

  • The average cost must be recalculated after each purchase

How do I find the value of inventory using the AVCO method?

  • You have to go through the transactions in chronological order

After each purchase transaction

  • STEP 1
    Calculate the total number of units

    • Add the number of units purchased to the current number of units

    • You might need to calculate the number of units purchased

      • Number space of space units space purchased space equals space fraction numerator Total space price over denominator Purchase space price space per space unit end fraction

  • STEP 2
    Calculate the total value of all the inventory

    • Add the total price of the units purchased to the current value of the inventory

    • You might need to calculate the total price of the units purchased

      • Total space price space equals space purchase space price space per space unit space cross times number space of space units space purchased

  • STEP 3
    Calculate the new average cost of each unit

    • Average space cost space of space each space unit space equals space fraction numerator Total space value space of space inventory over denominator Number space of space inventory space units end fraction

After each sales transaction

  • STEP 1
    Calculate the total number of units remaining

    • Subtract the number of units sold from the current number of units

  • STEP 2
    Calculate the total value of the remaining inventory

    • Multiply the number of units remaining by the current average cost of each unit

  • The average cost of each unit does not change after a sale

Examiner Tips and Tricks

Make sure to not use the selling price of products when calculating the value of inventory. Inventory is always recorded at their purchase price.

Worked Example

A business owner has no inventory on 1 February. Below are a list of transactions involving the sales and purchases of inventory.

2 Feb: 8 units purchased at $10 each 

7 Feb: 6 units sold 

9 Feb: 9 units purchased at $11 each 

16 Feb: 10 units sold 

24 Feb: 7 units purchased at $12 each 

27 Feb: 6 units sold 

Calculate the value of the closing inventory using the AVCO method.

Answer:

Date

Number of units

Total value

Average cost of each unit

2 Feb

8

8 × $10 = $80

$10

7 Feb

8 - 6 = 2

2 × $10 = $20

$10

9 Feb

2 + 9 = 11

$20 + (9 × $11) = $119

$119 ÷ 11 = $10.82

16 Feb

11 - 10 = 1

1 × $10.82 = $10.82

$10.82

24 Feb

1 + 7 = 8

$10.82 + (7 × $12) = $94.82

$94.82 ÷ 8 = $11.85

27 Feb

8 - 6 = 2

2 × $11.85 = $23.70

$11.85

Closing inventory is $23.70

Examiner Tips and Tricks

This is the same example as on the FIFO revision note. Comparing the value of closing inventory, AVCO leads to a value $0.30 less than FIFO.

During times of rising prices, FIFO generally leads to a higher valuation of closing inventory.

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Author
Reviewer
Seina Murakami

Author: Seina Murakami

Expertise: Accounting Content Creator

Seina studied Pharmacology at UCL, though her professional passion lies deeply in the world of accounting and finance. With an A* in CIE A-Level Accounting and extensive experience tutoring IGCSE and IAL students, she specializes in making complex financial concepts accessible. From developing comprehensive revision resources to collaborating with faculty on lesson materials, Seina is dedicated to helping students bridge the gap between struggling with content and mastering it.

Dan Finlay

Reviewer: Dan Finlay

Expertise: Maths Subject Lead

Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.