What is the Weighted Average Method?
The weighted average (or average cost) method values inventory by spreading the total cost of goods available for sale evenly across all units, rather than tracking individual purchase batches. It's simple to apply and smooths out price swings between FIFO and LIFO.
The weighted average method calculates a single average cost per unit by dividing the total cost of goods available for sale by the total units available, then uses that average for both COGS and ending inventory.
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Step-by-step worked examples
A company has 100 units at $8 and later buys 150 units at $10. What is the weighted average cost per unit?
Total cost = (100×8) + (150×10) = 800 + 1,500 = $2,300 Total units = 100 + 150 = 250 WAC = 2,300 / 250 = $9.20 per unit
Using the same data (WAC = $9.20/unit), find COGS if the company sells 180 units.
COGS = units sold × WAC COGS = 180 × 9.20 = $1,656
A company adds a third purchase of 50 units at $11 to the previous 250 units (total cost $2,300). Find the new weighted average cost.
New total cost = 2,300 + (50×11) = 2,300 + 550 = $2,850 New total units = 250 + 50 = 300 New WAC = 2,850 / 300 = $9.50 per unit
Flashcards
Quick quiz
Q1.The weighted average cost per unit is calculated as…
Q2.200 units at $4 and 100 units at $7 are available. What is the WAC?
Q3.Compared to FIFO and LIFO, the weighted average method generally produces COGS that is…
Q4.In a perpetual inventory system, the weighted average is recalculated…
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Common mistakes
Using the ending inventory cost instead of the total cost of goods available. — Correct: The numerator must be the total cost of ALL units available for sale, including what's already sold.
Forgetting to update the average after each new purchase in a perpetual system. — Correct: In a perpetual (moving average) system, recalculate WAC every time new inventory is added.
Rounding the average cost too early in multi-step problems. — Correct: Carry extra decimal places through calculations and round only the final answer to avoid compounding errors.
Assuming weighted average always gives results between FIFO and LIFO exactly at the midpoint. — Correct: It falls between them, but not necessarily exactly halfway — it depends on purchase quantities and timing.
FAQ
What is the weighted average method?
It's an inventory valuation method that assigns one blended average cost to every unit, based on total cost of goods available divided by total units available.
What is the weighted average formula?
WAC = Total cost of goods available for sale ÷ Total units available for sale.
What are some weighted average method examples?
A hardware store blending the cost of nails bought at different prices throughout the year into a single average cost per unit.
How do you calculate weighted average cost and COGS?
Divide total cost of goods available by total units available to get WAC, then multiply WAC by units sold to get COGS.