ITPEC IP October 2020 Question 66
When the purchase and sales of a product in April are as in the table below, what is the inventory value in yen for the product at the end of April according to the moving average method? The moving average method calculates the average unit price of products in the inventory each time a purchase is made, and uses the average unit price for products in the inventory immediately beforehand for the calculation of the inventory value.
Explanation
1,400 yen — under the moving average method, a sale removes units at the current average price, and only a purchase recalculates the average.
- •April 8: 1,000 + 1,400 = 2,400 yen for 200 units, average 2,400 ÷ 200 = 12 yen (as in the table)
- •April 18: sell 150 at 12 yen; 50 units remain, worth 50 × 12 = 600 yen
- •April 29: buy 50 at 16 yen = 800 yen; inventory is 100 units worth 600 + 800 = 1,400 yen (new average 14 yen)
Answer (c)
Why not others:
- •(a) 1,280 — the periodic (total) average: all units received 3,200 ÷ 250 = 12.8 yen × 100 units, which ignores the order of purchases and sales
- •(b) 1,300 — last-in first-out: the sale takes the 100 units at 14 yen and 50 at 10 yen, leaving 50 at 10 yen, 500 + 800
- •(d) 1,500 — first-in first-out: the sale takes the 100 units at 10 yen and 50 at 14 yen, leaving 50 at 14 yen, 700 + 800
Key rule: Moving average recalculates the unit price after every purchase and values each shipment at the average in force at that moment; FIFO, LIFO and the periodic average give different figures from the same data.
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