What is a disadvantage of AVCO?

What is a disadvantage of AVCO?

• A. Average price rarely reflects actual purchase price
• B. It always uses the latest price
• C. It results in perfect cost allocation
• D. It cannot be used for external reporting

Answer: (A)

AVCO values inventory by applying a single weighted average cost per unit to all units available for sale. Because prices can fluctuate, this approach smooths out those changes rather than tying cost to the actual price paid for each specific item. The main disadvantage is that the average cost often does not reflect the actual purchase price of particular items sold, so the cost of goods sold and the ending inventory may not match the real costs incurred for those items. This reduces precision in profit reporting and can mislead decisions when specific batches or lots have significantly different costs. The other statements don’t fit: AVCO does not always use the latest price since it relies on a weighted average, not the most recent purchase price. It does not give perfect cost allocation—no method does, and AVCO’s smoothing is part of its nature. And AVCO can be used for external reporting, so saying it cannot be used externally is not correct.

AVCO values inventory by applying a single weighted average cost per unit to all units available for sale. Because prices can fluctuate, this approach smooths out those changes rather than tying cost to the actual price paid for each specific item. The main disadvantage is that the average cost often does not reflect the actual purchase price of particular items sold, so the cost of goods sold and the ending inventory may not match the real costs incurred for those items. This reduces precision in profit reporting and can mislead decisions when specific batches or lots have significantly different costs.

The other statements don’t fit: AVCO does not always use the latest price since it relies on a weighted average, not the most recent purchase price. It does not give perfect cost allocation—no method does, and AVCO’s smoothing is part of its nature. And AVCO can be used for external reporting, so saying it cannot be used externally is not correct.