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Average costing method has the following main advantages:
1.It is a realistic costing method useful to management in analyzing operating results and appraising future production.
2.It minimizes the effect of unusually high or low materials prices, thereby making possible more stable cost estimates for future work.
3.It is practical and less expensive perpetual inventory system.
The average costing method divides the total cost of all materials of a particular class by the number of units on hand to find the average price. The cost of new invoices are added to the total in the balance column; the units are added to the existing quantity; and the new total cost is divided by the new quantity to arrive at the new average cost. Materials are issued at the established average cost until a new purchase is recorded. Although a new average cost may be computed when materials are returned to vendors and when excess issues are returned to the storeroom, for practical purposes, it seems sufficient to reduce or increase the total quantity and cost, allowing the unit price to remain unchanged. When a new purchase is made and a new average is computed, the discrepancy created by the returns will be absorbed.
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