What is the average cost method of inventory accounting based on?

The average cost method of inventory accounting is based on calculating a weighted average of the costs of inventory items. This method involves taking the total cost of goods available for sale and dividing it by the total number of units available for sale. The resulting average cost is then used to value both the ending inventory and the cost of goods sold during the period.

This approach smooths out price fluctuations over time, ensuring that the cost of inventory is neither too sensitive nor responsive to market changes. It helps in producing a more stable view of inventory costs, particularly in environments where prices can vary frequently.

Using this method is particularly advantageous for businesses that sell homogeneous products, as it simplifies the record-keeping process and allows for more straightforward calculations. It provides a pragmatic solution in situations where tracking the specific cost of each item may be burdensome or impractical.