Question

How does the average-cost method of inventory costing differ between a perpetual inventory system and a periodic inventory system?

Answer 1

The average cost method is also called weighted average method.The average cost method of inventory enables cost to inventory based on the total costs of goods purchased during the period divided by the total numbers of items purchased.However it is categorised into two systems:Perpetual inventory system and a periodic inventory system. Both these methods helps to find out the inventory in hand.

Here are the diiferences between a perpetual inventory system and a periodic inventory system.

1)Definitions:

Perpetual inventory system-It is a method of inventory system which records real time transactions of inventory that is received and sold with the help of technology.This system is more efficient method as technology reduces the chances of error and effective use of resources.

Periodic inventory system is a traditional system or less effective as in this the invnetory is updated at the end of an accounting period .Dur to this limitation,it is difficult to find out the inventory at the mid of the year.This mehod allows to track its beginning inventory and ending inventory.

2)Basis:

Perpetual inventory system is based on book records

Periodic inventory system is based on physical verification.

3)Information:

Perpetual inventory system: It gives information about inventory and cost of sales

Periodic inventory system: It gives information about inventory and cost of goods sold

4)Balancing figure:

Perpetual inventory system: The balancing figure is inventory

Periodic inventory system : The balancing figure is cost of goods sold.

5)Affect on business operations

Perpetual inventory system: The operations of the business does not influence by this method.

Periodic inventory system:The Business operations need to be stopped in this method during valuation of inventory.