In a period of falling prices, the average-cost method results in a lower cost of goods sold than the FIFO method.

Question

Quizplus · Accepted Answer

The average-cost method calculates the cost of goods sold based on the average cost of all the inventory purchased, whereas the FIFO method assumes that the first goods received are the first goods sold. In a period of falling prices, the average cost is likely to be lower than the cost of the goods purchased earlier, which would result in a lower cost of goods sold under the average-cost method compared to FIFO.

In a Period of Falling Prices, the Average-Cost Method Results