Average cost

Glossary / Average cost · Also called Weighted average cost, Moving average cost

How it works

The moving average used by most small-business software is recalculated with each receipt: total cost on hand divided by units on hand. Sales do not change the average; they take units out at it.

Average cost sits between FIFO and LIFO. When prices rise, it gives a cost of goods sold a little higher than FIFO and an inventory value a little lower. It suits businesses that sell interchangeable goods where tracking purchase layers adds work but little insight.

Average cost needs fewer records than FIFO. You do not track which delivery each unit came from, only the running quantity and total cost. A stock count that differs from the books is corrected at the current average, which keeps the value consistent.

Worked example: A moving average through two purchases

An item starts with no stock.

In the US and in Canada

In the United States

Average cost is an accepted method for US tax. Once chosen, changing methods generally needs IRS consent.

In Canada

Average cost is accepted for Canadian tax and under Canadian accounting standards.

In AcboBooks

AcboBooks uses average cost for inventory, recalculated as stock is received. Each sale takes the item out of stock at its average cost and posts cost of goods sold. The Inventory Valuation report shows each item's quantity, average cost and value.

Related terms

• FIFO
• Inventory valuation
• Cost of goods sold (COGS)
• Item receipt

Related on this site

• FIFO vs average cost
• Inventory in AcboBooks
• Purchase orders in AcboBooks

Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.

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