Which inventory cost flow method uses the average cost per unit to compute cost of goods sold?

• A. FIFO
• B. LIFO
• C. Weighted Average
• D. Specific Identification

Answer: (C)

When you account for inventory, the cost flow method determines how the cost of goods sold is calculated from the costs available for sale. The weighted average method uses the average cost per unit across all units available for sale to compute COGS. You first find the average cost per unit by dividing the cost of goods available for sale (beginning inventory plus purchases) by the total units available. Then multiply that average by the number of units sold to get COGS, and multiply by the units remaining to get ending inventory. This approach smooths out price fluctuations because every unit carries the same average cost. The other methods assign costs differently—FIFO uses the oldest costs for COGS, LIFO uses the newest, and specific identification assigns the exact cost to each unit—so they do not rely on an average cost per unit.