Moving-Average Cost

Moving-Average Cost is a method of calculating Ending Inventory cost. Assume that both Beginning Inventory and beginning inventory cost are known. From them the "Cost per Unit of Beginning Inventory" can be calculated. During the year, multiple purchases were made. Each time, purchase costs are added to beginning inventory cost to get "Cost of Current Inventory". Similarly, the number of units bought is added to beginning inventory to get "Current Goods Available for Sale". After each purchase, Cost of Current Inventory is divided by Current Goods Available for Sale to get "Current Cost per Unit on Goods". Also during the year, multiple sales happened. The Current Goods Available for Sale is deducted by the amount of goods sold, and the Cost of Current Inventory is deducted by the amount of goods sold times the latest (before this sale) Current Cost per Unit on Goods. This deducted amount is added to Cost of Goods Sold. At the end of the year, the last Cost per Unit on Goods, along with a physical count, is used to determine ending inventory cost.

References

1. Intermediate Accounting 8th Canadian Edition, page 447, Kieso, Weygandt, Warfield, Young, Wiecek, John Wiley & Sons Canada, Ltd, 2007, ISBN 978-0-470-83979-9