Understanding Average Cost Benefits
In addition to being a GAAP compliant method, using average cost for inventory valuation is also beneficial because the total inventory value equals the sum of all inventory transactions.
Based on the example in Understanding Inventory Valuation and Item Cost:
- Inventory Value: 4 x $45 = $180
- Transaction Summary:
If a frame sold at $200, the profit for the frame using the average cost of the frame would be $155 ($200 - $45) when using average cost valuation. After the sale, the total inventory value continues to equal the sum of all inventory transactions.
- Average Cost Inventory Value: 3 x $45 = $135
- Sum of Inventory Transactions:
