![]() Businesses using cost-plus pricing strategy: Since the unit cost of inventory changes every purchase, the average cost method isn’t suitable if you use the cost-plus pricing strategy because you have to revise the selling price when the average cost changes.Since there are only a few items to keep track of, it’s easiest and most accurate to keep a record of the actual cost of each item. Businesses with high-value, small-volume items: If your business deals with a small volume of high-value items, such as jewelry and vehicles, then it’s best to use the specific identification method.Hence, the IRS requires companies to use LIFO for bookkeeping purposes if they also use it for tax purposes. That’s why some businesses use LIFO to get tax savings because of a lower taxable income. Businesses using LIFO for tax purposes: The LIFO method of inventory costing yields the lowest net income during periods of increasing costs.If you don’t frequently purchase merchandise to replenish stocks, then you might prefer to use FIFO to match cost flow assumption with the physical flow of goods. Businesses with relatively low purchase volumes: The essence of the average cost method is to compute the average inventory cost every time you purchase inventory.You need not keep track of purchase dates and layers to determine inventory cost. Businesses looking for a simple inventory costing method: The AVCO method is the most straightforward inventory cost flow assumption to implement.It’s better to use the average cost method to make it easier to cost agricultural products without assigning a unit cost manually. Businesses selling agricultural produce: Maintaining the individual unit cost of agricultural produce is demanding since most are sold in bulk.Under the weighted-average method, the cost of the inventories recognized is based on a weighted average calculation, in which the total production costs are added and then. Ending Inventory Beginning Inventory Balance COGS + Raw Material Purchases. For example, you purchase 10 bottles at 20 each, and an additional 10 bottles at 30 each. Here’s the way to calculate it: Weighted Average Cost Total Cost of Inventory / Total Inventory Units. For companies selling these products, the AVCO method best depicts their relationship by commingling them into one average unit cost. The formula to calculate the ending inventory balance is as follows. Using the weighted average cost method, businesses assign a value to inventory based on the average cost of production of the product. Businesses with highly intertwined products: Products that are highly intertwined, or complementary goods, have limited use if used individually. ![]() With the average cost method, you can smooth fluctuations in inventory prices by computing the average inventory cost per unit. Weighted average is a mean calculated by giving values in a data set more influence according to some attribute of the data. ![]()
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