Weighted Average Cost

Weighted average cost is an inventory valuation method used where different quantities of goods are purchased at different unit costs. Under this weighted average cost method, weights are assigned to the cost price on the basis of the quantity of each item at each price. The weighted average cost considers that the cost of inventory is based on the average cost of the goods available for sale during the period.

Weighted average cost is a cost method which is used for calculating the ending inventory. Weighted average cost takes Cost of Goods Available for Sale and divides it by the total amount of goods from beginning inventory and purchases. This formula gives weighted average cost per unit. The next step involves a physical count is then performed on the ending inventory to determine the amount of goods left. Finally, this amount is then multiplied by Weighted Average Cost per Unit to give an estimate of ending inventory cost. In the case where perpetual inventory system is used, the weighted average method is called the moving average method.

 The procedure for computing the weighted average unit cost of a process is as follows. First the beginning work-in-process inventory costs are added to the costs of the current period, and then a weighted average is obtained by dividing the combined costs by equivalent units. Finally there is only one average cost for goods completed. Here the equivalent unit under weighted average costing is computed as follows:

Units completed + (ending work-in-process x degree of completion (%))

Under this method of weighted average approach, both inventory and the cost of goods sold are based upon the average cost of all units currently in stock at the time of reporting. Under the condition when inventory turns over rapidly this approach, it will more closely resemble FIFO than LIFO.

Questions

• What is weighted average cost?
• How is weighted average cost calculated?