Inventory Valuation- AVCO

Question 1

What are the advantages of AVCO?

Answer 1

The average price method is accepted by the Inland Revenue.

It is simpler to calculate and easier to administer than the FIFO method.

Where prices fluctuate often, it gives a more even price than the FIFO method.

Question 2

What are the disadvantages of AVCO?

Answer 2

When prices are rising rapidly, the average cost may be lower than the actual replacement cost.

Each time materials are received or returned to the supplier, the average cost must be recalculated.

The price charged to production per unit, may not reflect any of the actual prices paid.