Final answer:
The Weighted Average Cost method calculates a new cost per unit after each inventory purchase by including the cost of new goods and dividing it by the total number of units on hand, offering a way to measure cost per unit that accounts for changes in price.
Step-by-step explanation:
The method based on a new cost per unit calculated after each purchase is known as the Weighted Average Cost method. It involves adjusting the average cost of goods each time a new purchase is made. This method is essential in inventory management and accounting, as it allows firms to measure their cost per unit in a way that smooths out the effects of price changes over time. When a new batch of goods is purchased, the total cost of the existing inventory plus the cost of the new purchase is divided by the total number of units, existing and new, to calculate the updated average cost.
For example, if a company has 100 widgets in stock at an average cost of $5 each, and it purchases another 100 widgets at $6 each, the new average cost will be ($500 + $600) / 200 = $5.50 per widget. This updated average cost will then be used to value inventory and determine the cost of goods sold.
Using this method helps in monitoring marginal cost and average cost, which are crucial for pricing strategy and profitability analysis. Marginal cost is the cost of producing one more unit of output and is useful for decision-making related to production levels. Average cost, on the other hand, provides insight into the overall efficiency of production processes.