average-cost method

Average-Cost Method

A costing method by which the value of a pool of assets or expenses is assumed to be equal to the average cost of the assets or expenses in the pool.

Notes:

For example, if one share of Company A's stock is purchased on June 1 for $50.00, again on June 15 for $35.00, and again on Aug 10 for $40.00, the average-cost method assumes that three stocks were purchased for an average cost of $41.67. This number is arrived at by adding $50.00 + $35.00 + $40.00 and dividing the sum by 3, because there are three stocks in the pool.

See also: Asset Valuation, Capital Gain, Capital Loss, First In, First Out - FIFO, Last In, First Out - LIFO, Specific-Shares Method

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average-cost method

1. A method of determining the value of an inventory by calculating unit cost, that is, the result obtained by dividing the total cost of goods available for sale by the number of units available for sale. See also inventory valuation.

2. A method of valuing the cost basis of securities that are sold in order to determine the gain or loss for tax purposes. Average cost is calculated as total cost of shares owned divided by the number of shares owned. The average-cost method is particularly useful for shares acquired at varying prices in a reinvestment plan.