Final answer:
The average cost method mitigates the impact of price fluctuations by spreading out the cost over a large number of units, providing a smoothed cost per unit and is the cost formula that smooths effects of price changes.
Step-by-step explanation:
The cost formula that smooths the effects of price changes is the average cost method. This method is useful in accounting for inventory and cost of goods sold. It takes the total cost of goods available for sale over a period and divides it by the total number of units available for sale, yielding an average cost per unit.
Unlike the specific identification method which tracks each item's actual cost, or FIFO (First-In, First-Out) which assumes the oldest inventory items are sold first, average cost does not require tracking of individual inventory items. The lower of cost and net realizable value is a valuation method, not a cost-flow assumption method, which requires comparing the market cost to the net amount an entity expects to realize from the sale of inventory.
When prices are volatile, the average cost method mitigates the impact of price fluctuations by spreading the cost over a large number of units, providing a smoothed cost per unit that reflects a more consistent value for inventory on hand.