ITPEC FE Morning April 2018 Question 79

Periodic average method — one average unit price for the whole period, total purchase amount ÷ total quantity, taken at the period end.

At the end of the accounting period, the cost of the opening stock and all purchases of the period is added up and divided by the total quantity. That single unit price values both the goods issued and the closing inventory. Example: 100 units at 10 dollars and 100 units at 14 dollars give (1,000 + 1,400) ÷ 200 = 12 dollars per unit.

Answer (b)

Why not others:

• •(a) First-in first-out — assumes the oldest goods are issued first, so closing stock carries the latest purchase prices; nothing is averaged
• •(c) Moving average — also total cost ÷ total quantity, but recalculated at every receipt, not once over all the purchases of the period
• •(d) Final acquisition cost — values the whole inventory at the unit price of the last purchase; nothing is averaged

Key rule: Both average methods divide total cost by total quantity; the moving average recalculates at every receipt, the periodic average once per period.

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