Why do accountants typically calculate the cost per unit as an average under inventory systems?

• A. To ensure that the highest cost items are always expensed first, maximizing cost of goods sold.
• B. To match the most recent purchase costs with current sales, reflecting current market values.
• C. To allocate total inventory costs evenly across all units, especially when units are indistinguishable or purchased at different prices.
• D. To minimize the reported cost of goods sold and increase net income.

Answer: (C)

Verified step by step guidance

1. Understand the concept of inventory costing methods: Accountants use inventory costing methods to allocate the cost of inventory to cost of goods sold (COGS) and ending inventory. Common methods include FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Average Cost.
2. Recognize the purpose of calculating cost per unit as an average: When inventory items are indistinguishable or purchased at varying prices, calculating an average cost per unit ensures that the total inventory cost is evenly distributed across all units.
3. Learn how the average cost method works: Under the average cost method, the total cost of inventory is divided by the total number of units available for sale. This provides a uniform cost per unit, which is then used to calculate both COGS and ending inventory.
4. Understand why this method is used: The average cost method simplifies accounting for inventory when individual items cannot be easily identified or when prices fluctuate. It avoids the complexity of tracking specific costs for each unit and provides a fair allocation of costs.
5. Recognize the implications: Using the average cost method does not prioritize expensing higher or lower cost items first. Instead, it ensures consistency and fairness in cost allocation, which is particularly useful for businesses with homogeneous inventory or frequent price changes.