# Average cost the average cost method in a perpetual

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Average-Cost The average-cost method in a perpetual inventory system is called the moving- average method . Under this method the company computes a new average after each purchase , by dividing the cost of goods available for sale by the units on hand. They then apply the average cost to: (1) the units sold, to determine the cost of goods sold, and (2) the remaining units on hand, to determine the ending inventory amount. Illustration 6A-4 shows the application of the moving-average cost method by Houston Electronics. Balance Date Purchases Cost of Goods Sold (in units and cost) January 1 (100 @ \$10) \$1,000 April 15 (200 @ \$11) \$2,200 (300 @ \$10.667) \$3,200 August 24 (300 @ \$12) \$3,600 (600 @ \$11.333) \$6,800 September 10 (550 @ \$11.333) (50 @ \$11.333) \$ 567 \$6,233 November 27 (400 @ \$13) \$5,200 (450 @ \$12.816) \$5,767 Illustration 6A-4 Perpetual system— average-cost method Cost of goods sold Ending inventory PDF Watermark Remover DEMO : Purchase from to remove the watermark

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Appendix 6A Inventory Cost Flow Methods in Perpetual Inventory Systems 273 As indicated above, Houston Electronics computes a new average each time it makes a purchase . On April 15, after it buys 200 units for \$2,200, a total of 300 units costing \$3,200 (\$1,000 H11001 \$2,200) are on hand. The average unit cost is \$10.667 (\$3,200 H11004 300). On August 24, after Houston Electronics buys 300 units for \$3,600, a total of 600 units costing \$6,800 (\$1,000 H11001 \$2,200 H11001 \$3,600) are on hand, at an average cost per unit of \$11.333 (\$6,800 H11004 600). Houston Electronics uses this unit cost of \$11.333 in costing sales until it makes another purchase, when the company computes a new unit cost. Accordingly, the unit cost of the 550 units sold on September 10 is \$11.333,and the total cost of goods sold is \$6,233.On November 27, following the purchase of 400 units for \$5,200, there are 450 units on hand costing \$5,767 (\$567 H11001 \$5,200) with a new average cost of \$12.816 (\$5,767 H11004 450). Compare this moving-average cost under the perpetual inventory system to Illustration 6-10 (on page 259) showing the average-cost method under a periodic inventory system. DO IT! Comprehensive Do It! 1 on page 269 showed cost of goods sold computations under a pe- riodic inventory system. Now let’s assume that Gerald D. Englehart Company uses a per- petual inventory system.The company has the same inventory, purchases, and sales data for the month of March as shown earlier: Inventory: March 1 200 units @ \$4.00 \$ 2, 800 Purchases: March 10 500 units @ \$4.50 2,250 March 20 400 units @ \$4.75 1,900 March 30 300 units @ \$5.00 1,500 Sales: March 15 500 units March 25 400 units The physical inventory count on March 31 shows 500 units on hand. Instructions Under a perpetual inventory system , determine the cost of inventory on hand at March 31 and the cost of goods sold for March under (a) FIFO, (b) LIFO, and (c) average-cost. Comprehensive 2 action plan a20 Compute the cost of goods sold under the per- petual FIFO method by allocating to the goods sold the earliest cost of goods purchased. a20 Compute the cost of goods sold under the per- petual LIFO method by al- locating to the goods sold the latest cost of goods purchased.
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