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For the same June data under the perpetual system, total cost of merchandise sold is $85 under FIFO, $98 under LIFO, and $90.70 under average cost. What does this ordering illustrate about the average cost method?
AIts result typically falls between FIFO and LIFO
BIts result is always the lowest of the three
CIts result is always the highest of the three
DIts result always equals the FIFO result exactly
Answer & Solution
Correct answer: A. Its result typically falls between FIFO and LIFO
1. FIFO cost of sales is $\$85$ and LIFO is $\$98$.
2. Average cost of sales is $\$90.70$, which sits between those two figures.
3. The text states the average cost result typically falls between LIFO and FIFO.
4. Rule out the always-lowest or always-highest claims, since $\$90.70$ is neither extreme.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.1.1 "Perpetual Inventory System", p.119_
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