The Average Cost Method (AVCO) is an accounting approach used in inventory management to assign costs to inventory and cost of goods sold. Under AVCO, the cost of inventory is calculated as the weighted average cost of all units available for sale during a period. This method smoothens price fluctuations over time, providing a stable cost basis. AVCO is particularly useful when inventory items are indistinguishable from each other and is favored for its simplicity and ability to reduce the effects of extreme price variations, thus facilitating consistent financial reporting.