Under the average cost method, the flow of goods through the accounting records will do what to physical flow
Under the average cost method, the flow of goods through the accounting records may differ from the physical flow. This is because the average cost method uses an average cost to determine the value of the inventory rather than tracking the specific cost of each item as it enters or leaves the company's stock.
To understand how the average cost method affects the flow of goods, let's break it down step by step:
1. Physical Flow: In the physical flow of goods, the actual movement of inventory occurs. This includes receiving goods into the company, storing them, and eventually selling or using them. For example, let's say a company receives 100 units of a product and then sells 50 units. In this case, the physical flow would be: 100 units received → 50 units sold → 50 units remaining in stock.
2. Accounting Flow: In the accounting flow, the focus is on how the value of the inventory is reflected in the financial records. The average cost method calculates the value of the remaining inventory based on the average cost of units purchased or produced. It does not specifically identify which units were sold, but rather uses the average cost to assign a value to the goods remaining in stock.
To illustrate this, let's assume that the 100 units of a product were purchased over time at different costs:
- 50 units were purchased at $10 each
- 50 units were purchased at $15 each
Now, when 50 units are sold under the average cost method, the accounting flow will assign a cost to the remaining 50 units based on the average cost of all units:
- Average cost = [(50 units x $10) + (50 units x $15)] / 100 units
- Average cost = ($500 + $750) / 100 units
- Average cost = $12.50 per unit
Therefore, after selling 50 units, the accounting flow would reflect 50 units remaining in stock valued at $12.50 each, regardless of the actual cost at which the units were purchased.
In summary, under the average cost method, the flow of goods through the accounting records may deviate from the physical flow, as it assigns a consistent average cost to the remaining inventory rather than tracking the specific costs of individual units.