Average Cost Inventory is an inventory valuation method used to determine the cost of goods sold and value of ending inventory. It averages out all transactional costs associated with a particular item, such as freight costs, duties, taxes and discounts. This method of inventory accounting helps to ensure that businesses are not overvaluing their inventory and incurring unnecessary income tax liabilities. It also makes budgeting easier by making it easier to manage the costs of purchasing merchandise. Average Cost Inventory is essential for businesses that need accurate data to make timely and informed decisions.