Final answer:
Perpetual inventory management using average cost involves calculating the average cost of goods by dividing the total cost by the quantity of output and updating this with each transaction. Marginal cost is also essential, representing the cost of producing one more unit. Round the average cost per unit to the nearest cent and all other amounts to the nearest dollar in practice.
Step-by-step explanation:
To prepare a perpetual inventory record using average cost, you must first understand the concept of average cost and how it relates to inventory management. Average cost is defined as total cost (TC) divided by the quantity (Q) of output produced. To calculate this, we use the formula AC = TC/Q. For example, if producing two widgets has a total cost of $44, then the average cost per widget would be $22, as calculated by $44 divided by 2.
The other important cost measure is marginal cost (MC), which is the cost of producing one additional unit of output. It is determined by the change in total cost (ATC) divided by the change in quantity (ΔQ). So if the cost of the first widget is $32.50 and the cost for two widgets is $44, the marginal cost for the second widget is $11.50, found by subtracting the cost of the first widget from the total cost for two widgets and dividing by the change in quantity.
When managing inventory, it's essential to update the average cost per unit each time a new purchase is made. This new average cost is used to value the inventory and cost of goods sold (COGS). When recording inventory transactions in a perpetual system, every purchase and sale is recorded in real-time, affecting the average cost calculation.
To apply this in practice, start by determining the fixed and variable costs of production and then calculate the total cost, average cost, and marginal cost according to the formulas provided. When new inventory is purchased, add the cost of the new inventory to the total cost of existing inventory and divide by the total units available to get the new average cost. Due to the perpetual nature of this process, these calculations must be updated continuously with each transaction. As instructed, remember to round average cost per unit to the nearest cent and all other amounts to the nearest dollar.