Accounting Online Program Certification Practice Test

Using the AVCO method, what is the cost of closing inventory for Mickey Ltd after several purchases and a sale?

1. £1,110

2. £1,400

3. £1,500

4. £1,250

The correct answer is: £1,110

The cost of closing inventory under the Average Cost (AVCO) method is determined by calculating the weighted average cost of the inventory items available for sale, which includes the costs of all purchases made during the accounting period and any existing inventory at the beginning of that period. To calculate this, total the cost of all inventory before the sale, divide it by the total number of units available, and then multiply by the number of units remaining in stock after the sale. This effectively smooths out price fluctuations over time and provides a consistent value for inventory on the balance sheet. For Mickey Ltd, if the calculated closing inventory using the AVCO method totals £1,110 by accurately accounting for all relevant purchases and sales, this indicates a proper application of the method, ensuring that the average cost reflects the current economic conditions of the inventory in question. Calculating it this way is beneficial because it mitigates the impact of price volatility on inventory value, leading to a more stable financial representation. Therefore, £1,110 as the closing inventory cost aligns with the principles of the AVCO method, capturing the intent of averaging costs over the transactions completed within the period.