Average Cost (AC)

Using average costing, the cost of each unit of inventory is calculated by dividing the total cost of all units in inventory by the total number of units. As new units are added to inventory, the total cost and total number of units are updated to reflect the new additions, and the average cost is recalculated.

Average cost can provide a more accurate picture of the cost of goods sold and the value of inventory over time, as it takes into account the fluctuations in the cost of goods. This method is commonly used in businesses where inventory costs can vary significantly over time, and it is particularly useful for businesses that deal with large quantities of inventory.

For example, if a company purchases 100 units of a product at a cost of £5 per unit, and then purchases an additional 100 units at a cost of £6 per unit, the total cost of all units in inventory is £1100, and the average cost is £5.50 per unit.

Overall, the average costing method is a useful tool for businesses that need to accurately track inventory costs and values, and it is important to select an inventory valuation method that aligns with the needs and characteristics of the business.

The Average Cost or AC is a simple representation of the value of each unit of stock. Because stock could have come from multiple suppliers or over time at different prices the AC is the mean value of all the units in stock.