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The Weighted Average Method | Weighted Average Costing
Weighted Average Method Overview
Under the weighted average inventory method, the cost of goods available for sale (beginning inventory plus net purchases) is divided by the number of units available for sale to obtain a weighted-average cost per unit. Ending inventory and cost of goods sold are then priced at this average cost.
Weighted average costing is commonly used in situations where:
- Inventory items are so intermingled that it is impossible to assign a specific cost to an individual unit.
- The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory layers.
- Inventory items are so commoditized (i.e., identical to each other) that there is no way to assign a cost to an individual unit.
The net result of using weighted average costing is that the recorded amount of inventory on hand represents a value somewhere between the oldest and newest units purchased into stock. Similarly, the cost of goods sold will reflect a cost somewhere between that of the oldest and newest units that were sold during the period.
Weighted Average Costing Example
Assume the following data:
| Units available |
Units sold |
Actual unit cost |
Actual total cost |
|
| Beginning inventory | 100 | -- | $2.10 | $210 |
| Sale | -- | 75 | -- | -- |
| Purchase | 150 | -- | 2.80 | 420 |
| Sale | -- | 100 | -- | -- |
| Purchase | 50 | -- | 3.00 | 150 |
| Total | 300 | 175 | $780 |
The weighted-average cost per unit is $780/300, or $2.60. Ending inventory is 125 units (300 – 175) at $2.60, or $325; cost of goods sold is 175 units at $2.60, or $455.
When the weighted-average assumption is applied using a perpetual inventory system, the average cost is recomputed after each purchase. This process is referred to as a moving average. Cost of goods sold is recorded using the most recent average. This combination is called the moving-average method and is applied below to the same data used in the weighted-average example above.
| Units on hand |
Purchases in dollars |
Cost of sales in dollars | Inventory total cost |
Inventory moving- average unit cost |
|
| Beginning inventory | 100 | $ -- | $ -- | $210.00 | $2.10 |
| Sale (75 units @ $2.10) | 25 | -- | 157.50 | 52.50 | 2.10 |
| Purchase (150 units, $420) | 175 | 420.00 | -- | 472.50 | 2.70 |
| Sale (100 units @ $2.70) | 75 | -- | 270.00 | 202.50 | 2.70 |
| Purchase (50 units, $150) | 125 | 150.00 | -- | 352.50 | 2.82 |
Cost of goods sold is 75 units at $2.10 and 100 units at $2.70, or $427.50.
Related Topics
FIFO vs. LIFO accounting
First-in first-out method
Last-in, first-out method
Specific identification method
What are perpetual LIFO and periodic LIFO?