Cxc Accounts

The Average Cost (AVCO) Method of stock valuation allows for the cost of units to be averaged over a period of time, making it possible for units issued (sold) to be priced at an average cost.

Advantages Disadvantages
1. Makes no assumptions about how the goods are issued. 1. More challenging to calculate 2. Valuation of closing stock will be close to the latest price. 2. A new average must be calculated with every purchase
3. Average price is mainly affected by the amount bought at the different prices. 3. The calculated average does not represent any actual price paid for the stocks

Fig. 1 Advantages and disadvantages of AVCO method and stock valuation

Worked example 1:

Information relating to a sole trader's receipts and issues of stock for the year 2008:

2008 Receipts Issues
January 1 600 units @ $2 each
February 14 400 units
May 16 1 000 units @ $4 each
July 21 800 units @ $5 each
August 19 1 600 units
September 14 1 600 units @ $6 each
October 20 1 600 units

AVCO method

Date Received Issued Balance

2008 Units Per
Units
$ Cost
$

Units Per
Units
$ Cost
$
Units Cost
$ $ $
Jan 600 2 1200 600 2 1 200
Feb 400 2 800 200 2 400
May 1 000 4 4 000 4 400/
1 200 3.67 4 404
July 800 5 4 000 8 404/ 2000 4.20 8 404
Aug 1 600 400 x 4.20 1 680
Sept 1 600 6 9 600 11 280/ 2000 5.64 11 280
Oct 1 600 400 5.64 2 256

Closing stock = 400 units valued at $2,250. The units are valued at weighted average price of $13.28 per unit.

Facts:

The higher the closing stock the higher the profit.

A lower the closing stock valuation with resilt in lower profits

Exercise 1:

You are required to use the information below to calculate the closing stock-in-trade using the AVCO.

Receipts and issues of a good are as follows:

Receipts Sales
Jan 40 x $30 each June 12 for $45 each
May 20 x $33 each Aug 44 for $46 each
July