The following lots of a Commodity P were available for sale during the year. Use this information to answer the questions that follow. Beginning inventory 5 units at $61 First purchase 15 units at $63 Second purchase 10 units at $74 Third purchase 10 units at $77 The firm uses the periodic system, and there are 20 units of the commodity on hand at the end of the year. What is the year-end inventory balance using the average cost method?

End of the year inventory balances records 20 units and its value totaling $69

Explanation:

Average cost method also known as Weighted Average Price is a type of inventory valuation method whereby the issue price is recalculated to get the average weighted price after each receipt. This particular type of method is simple to apply and it is acceptable to tax authorities. Since it is the weighted average of the purchase price, it is based on actual costs and does not lead to unrealized profit or loss. This method is not an actual buying cost.

  The formula for calculating the closing inventory using average cost method is :-

Cost of Goods Available for Sale ÷ Number of units available for sale (Number of goods from the beginning or opening inventory + purchases).

  Here, in order to make our calculations straight forward and simple, the formula for calculating the Cost Of Goods Available for Sale is :- Sum of beginning inventory + net purchases. Net purchases refer to the sum total of all purchases.

   Applying the above stated formula to the question,

Cost of Goods Available for Sale = (5 × $61) + (15 × $63) + (10 × $74) + (10 × $77)

= $305 + $945 + $740 + $770

= $2,760.

So, $2,760 is the Cost of Goods Available for Sale. Now, we can apply the second formulae because we already have a figure representing the Cost of Goods Available for Sale.

 Closing inventory is calculated as:-

Cost of Goods Available for Sale ÷ Number of units available for sale. The number of units available for sale consists the sum of goods from beginning inventory and purchases.

So, $2,760 ÷ 40 units( 5 units at beginning inventory + 15 units at first purchase + 10 units at second purchase + 10 units at third purchase) =  $69.

20 units of commodity P were said to be on- hand at the end of the year. Therefore, the end of the year inventory balance is 20 units of commodity P and its value is $69.

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