AVCO vs FIFO in Rising Prices

Steps:

• In rising prices, FIFO assigns oldest (lowest) costs to COGS, leaving newest (highest) costs in inventory.
• AVCO calculates a weighted average cost for both COGS and ending inventory.
• AVCO COGS exceeds FIFO COGS because average includes higher recent costs.
• AVCO ending inventory is lower than FIFO's because average is below newest costs.

Why D is correct:

• Per inventory costing definitions, AVCO's averaging in inflation raises COGS (lowering profit) and undervalues inventory relative to FIFO's recency principle.

Why the others are wrong:

• A: Inventory valuation is lower, not higher, under AVCO.
• B: Neither inventory nor profit is higher under AVCO.
• C: Profit is lower, not higher, due to elevated COGS.

Final answer: D