Inventory Valuation - AVCO

Question 1

What does ‘AVCO’ stand for?

Answer 1

Average Cost Valuation System

Question 2

What is AVCO?

Answer 2

This is a system of inventory valuation. It calculates the average cost of inventory held and can be used to place a value on materials (inventory) issued to a job and the closing inventory value which is shown in the Income Statement.

Question 3

What are the advantages of AVCO?

Answer 3

• The average price method is accepted by Inland Revenue.
• It is simpler to calculate and easier to administer than FIFO method,
• Where prices fluctuate often, it gives a more even price than FIFO method.

Question 4

What are the disadvantages of AVCO?

Answer 4

• 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.