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Periodic Inventory Average Cost Method

Brian Krogol
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Alright, so let's go ahead and do the average cost method for the same problem. So remember that average cost method, we have to find an average cost per unit. Okay, so to do that, what we want to do is find the total cost of all the goods available for sale, and that's where we're gonna find the average right so far. We know the quantity. We know the total quantity available for sale and I'm gonna scroll up for a second. Just so you remember what formula I'm trying to use here. It's this average cost formula average cost equals total cost over quantity. Okay? So we know the quantity the quantity here is the 2100 units. What we need to know is the total cost. Okay, so that's what we're gonna do right here. Let's first find the total cost. And we're gonna do that in this purple box that I've added on the right hand side. Alright, so we just go one by one here. The first thing was 1000 units times $20 per unit. Right In our beginning balance we had 1000 units times $20 per unit. So we're just multiplying across here, right? We're gonna multiply to find the total value of each shipment and this one was 20,000 for the for the beginning balance, then we have 500 times $22.40 per. And that's 11,000 whoops, that's a little sloppy. 11,200. And then the last shipment was 600 times 23.3 and that's 9 13,080. Okay, so there we go. We've got the total cost of each shipment. Let's go ahead and add them all together to get a total cost for everything. So 13 9 80 plus 11, 200 plus 20,000. We get a total value for all of these goods of 45,180. Okay. So now we know throughout the month and our beginning balance in total, the total value of all of that was 45,180 for 2100 units. Okay, so some of that's going to go to our cost of goods sold for the units we sold and some of that's gonna end up in our ending inventory. Okay, so remember average cost. Now we're ready to find our average cost per unit. We have our total costs and our total units. So let's let's figure it out, our average cost, which is what we're gonna use throughout this problem is 45,180 Divided by 20 100. Right, there's 45,180 in total cost and we're gonna divide that to get a per unit cost. So divided by 2100 total units. That's gonna give us a price of I'm gonna round it here. $21, I'll round it to $21.51 per unit. Okay, so each unit is $21.51. Now this gets really easy. That was the tricky part of this problem. Now, the last steps are really easy. Right, So we know how many units we sold, just like before we had 2100 total units minus the 800 left over that are in ending inventory. Well, 2100 minus 800 that's 1300 units. Right, just like in all the other cases we sold 1300 units. But look how easy it is now, 1300 units times our average cost. Right, we're gonna take our average cost over here. 21 51 times 20 whoops. 21 51. Look how easy that is, right, we've got our average cost 1300 Uh Times 21.51. So that comes out to 2709 63. Okay, so now that we know the total amount that's in cost of goods sold, well, everything else is just ending inventory, right? We had a total amount of cost minus this amount will get us to the ending inventory. Of course I'll do it both ways. Just so you can see we could just take the number in ending ending inventory that 800 units times the average cost. So there's two ways we can do this, we can take the total cost of 45,180. Right? That's the total cost that we calculated above minus the cost of goods sold 27-963. And that's gonna give us our ending inventory. 451 80 minus 27963, right? Because if we didn't sell it, well then it's gonna be an ending inventory 17,217. Okay, So that would be our ending inventory. Now, of course, we could just do 800 times 21-51. Our average cost, right? We could do the same thing 800 times our average cost. Sorry, let me get out of the way and we would get probably very close to the same answer. I feel like there's gonna be a rounding error here and there is we get 17 to 8 if we do it this way. Right? So if we do it this way, there's gonna be those those $9. The difference there, that isn't accounted for. That's why this is a safer way to do it because you're gonna make sure that you included all of the numbers in there, Right. Because we took the total cost And then uh subtracted the cost of goods sold. We already calculated all right. Now, this can only be a problem because we rounded right, we rounded this number right here, and that's why we got this bit of a discrepancy between the two. But at the end of the day, you probably think that you know in a big company maybe the $9 isn't going to be such a big deal, but you want to account for every dollar, and this is the best way to do. It would be to just subtract the cost of goods sold that you uh calculated. Alright. So that's the average cost method. You can see, it's pretty simple once you, once you find that average cost, Well, it's just the number of units times that average cost. Cool. Alright. Let's go ahead and move on to the next video.