COGS under Average Cost method in Inflationary Conditions

C

When prices are rising, the Average cost during the period is higher than the FIFO costs. Therefore, COGS under Average Cost method will be higher than the

FIFO COGS (but lower than the LIFO COGS).

Under inflationary conditions and stable inventories, the cost of goods sold (COGS) calculated using the Average Cost method may be different from the COGS calculated using the First-In, First-Out (FIFO) method.

The Average Cost method calculates the COGS by taking the average cost of all the units available for sale during the accounting period. This is done by dividing the total cost of goods available for sale by the total number of units available for sale. The average cost per unit is then multiplied by the number of units sold to determine the COGS.

On the other hand, the FIFO method assumes that the oldest units are sold first. It assigns the cost of the oldest units in inventory to the units sold, while the cost of the most recent units is assigned to the ending inventory. FIFO assumes that the cost of goods sold reflects the most recent costs incurred by the company.

Under inflationary conditions, the prices of goods tend to rise over time. This means that the costs of the most recent purchases are likely to be higher than the costs of the oldest purchases. As a result, the average cost per unit calculated under the Average Cost method may be lower than the cost of the most recent purchases used in the FIFO method.

In this scenario, the COGS calculated using the Average Cost method would be lower than the COGS calculated using the FIFO method. Therefore, the correct answer is:

A. Lower than FIFO COGS.