This video shows how to use the average cost method to calculate Cost of Goods Sold (COGS) and ending inventory for a company that uses a perpetual inventory system.
Companies that use a perpetual inventory system update the inventory account whenever inventory is purchased or sold. Thus, a company using LIFO and a perpetual system would not wait until the end of the period before adjusting the inventory account or recording Cost of Goods Sold; instead, it would record a journal entry to reflect the change in inventory whenever a transaction involving inventory occurs. Whenever inventory is sold, the company would calculate the average cost of the inventory on hand as of that date in time (this includes purchases up until that point in the period, plus any beginning inventory) and multiply this by the number of units sold to obtain the Cost of Goods Sold for that transaction (this goes on the Income Statement). If inventory is sold again later in that same period, the company must calculate another average cost that will be used to calculate the Cost of Goods Sold to be recognized on that transaction. Because the average cost is being re-calculated and is different for each transaction, this method is often referred to as a moving average.