The average cost method is a method of approximating the cost of goods that a company sold from its inventory. It can be difficult for a company to know the exact amount they paid for each individual item that they sell so instead they calculate the average cost of all the items in their inventory and then expense that average amount as the cost for each item sold. You may be more familiar with a similar term, blended cost(s). To calculate a more accurate average, companies use an average weighted based on the amount of the items at each purchase price in their inventory.
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