Under the average cost method the average cost of goods held in stock is recalculated after each receipt. An issue after the receipts is made at the recalculated average prices. A receipt of stock necessitates a reticulation of anew average. The average cost method attempts to avoid excessive variations in the cost materials used or value of closing stock that may result from the use of LIFO or FIFO methods.
Issuing materials at an average cost assumes that each batch taken from the storeroom is composed of uniform quantities from each shipment in stock at the date of issue. Often it is not feasible to mark or label each materials item with an invoice price in order to identify the used units with its acquisition cost. It may be reasoned that units are issued more or less at random as for as the specific units and the specific costs are concerned and that an average cost of all units in stock at the time of issue is satisfactory measure of materials cost. However, average costing may be used even though the physical withdrawal is an identifiable order. If materials tend to be made up of numerous small items low in unit cost and especially if prices are subject to frequent changes.