 Hello in this lecture. We're going to find average cost According to fundamental accounting principles wild 22nd edition the definition of average cost is Also called weighted average method for assigning inventory cost to sales the cost of available for sale units is divided by the number of units available to Determine per unit cost prior to each sale that is then multiplied by the units sold to yield the cost of that Breaking this down. We are talking about an inventory method So it might be called the average cost or it might be called the weighted average cost method being a method to value The inventory for example if we sell something like coffee mugs coffee mugs will be much the same in nature We don't want to specifically identify the cost of each coffee mug Assigning something like a serial number to each identity each coffee mug because they are identical That would be a waste of time waste of resources waste of money The coffee mugs will be much the same in cost But over time there will be a difference in costs probably going up in part due to inflation So for example under a weighted average method We can take the average cost and this is similar to a method that would be estimated to fifo lifo This is the weighted average method to give an estimate of what the cost is So if we start off with 100 units at 50 that's how much we paid for them Then we purchased more units. We're going to say that we purchased in this case 400 more units at 55 dollars cost went up notice That means that we purchased 22 000 more dollars worth of units Now we need to determine when we sell these units. Which ones did we sell did we sell them at 50? Or did we sell them at 55? What's the cost of the units that we sold under an average method? We're going to take the average. How do we calculate the average? I'm going to take the first 100 units at the 50 plus the 400 at the 55 We're first going to count the number of units being 500 100 plus the 400 Then the total dollar amounts the 5000 plus the 22 000 Giving us the 27 000 units 500 dollars 27 000 if we then take the 27 000 Dollars divided by the 500 units we get a unit cost of 54 So when we sell these coffee mugs, we're going to say they cost about 54 Notice that none of them cost 54. They actually cost 50 or 55 But the average is about 54 Closer to the 55 than the 50 you might be saying how did the average get on the high side here? And the reason is because we only had 100 units at 50. We had 400 units at 55 therefore we kind of took the weighted average And that means that we had the 54 being closer to the high side because we have more mugs that cost more money That 27 000 dollars worth then what would is what would be recorded on the trial balance And on the balance sheet the dollar amount of course not the units being represented on the financial statements When we then sell the units say we're going to sell some units then the question is What's the cost of those units not the sales price, but what's the cost? They might give us the sales price has nothing to do with the cost necessarily The cost here was 50 or 55 and the average was 54 Therefore if we're going to sell 420 units Then we're going to say that they cost $54 Because that's the average and that means that the cost then the cost of goods sold in this case would be 22,680 What then would be left? Well, we have the 500 minus the 420 gives us 80 units left. They all cost about $54 Therefore we have 4320 That is what is going to be left over This is what's going to be cost of goods sold for the transaction on the sale This is what will now be left in the ending inventory on the balance sheet on the trial balance