Weighted Average Cost Method
IntermediateThe weighted average cost method is an inventory costing method that assigns each unit sold, and each unit remaining, the average cost of all similar units available during the period.
Instead of tracking which specific items were sold, the weighted average method blends all purchase costs into a single average cost per unit.
For example, a shop buys 100 units at 10 each and 100 more at 12 each, giving 200 units at a total cost of 2,200. The weighted average cost is 11 per unit. If it sells 120 units, the cost of goods sold is 1,320, and the remaining 80 units are valued at 880.
Compared with FIFO, which charges the oldest costs first, the weighted average method smooths out price changes. When prices are rising, it produces a cost of goods sold between FIFO and methods based on the newest prices, and a profit figure that is less sensitive to recent price swings.
The method is simple to apply, especially for businesses holding large quantities of identical, interchangeable items, such as fuel, grain or chemicals, where tracking individual purchases would be impractical.
It is permitted under both IFRS and US GAAP. Some businesses update the average after every purchase, a variation known as the moving average method.
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