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How to Find Weighted Average Cost?

Published in Accounting 3 mins read

To find the weighted average cost, divide the total cost of goods available for sale by the total number of units available for sale. This method calculates a cost per unit that reflects the average price paid for all inventory items during a period.

Steps to Calculate Weighted Average Cost:

  1. Determine the Total Cost of Goods Available for Sale: This involves summing the cost of your beginning inventory and all purchases made during the period.

    • Beginning Inventory Cost: The total value of your inventory at the start of the period.
    • Purchase Costs: The cost of each purchase you made during the period, including any associated costs like shipping or handling.

    The formula for total cost of goods available for sale is:

    Total Cost of Goods Available = (Beginning Inventory Cost) + (Cost of Purchases)

  2. Determine the Total Units Available for Sale: This involves summing the number of units in your beginning inventory and the number of units purchased during the period.

    • Beginning Inventory Units: The number of units you had in stock at the start of the period.
    • Purchased Units: The number of units you purchased during the period.

    The formula for total units available for sale is:

    Total Units Available = (Beginning Inventory Units) + (Purchased Units)

  3. Calculate the Weighted Average Cost: Divide the total cost of goods available for sale by the total number of units available for sale.

    Weighted Average Cost = (Total Cost of Goods Available) / (Total Units Available)

Example:

Let's say a company has the following inventory data:

  • Beginning Inventory: 100 units at \$10 each (Total Cost = \$1,000)
  • Purchase 1: 200 units at \$12 each (Total Cost = \$2,400)
  • Purchase 2: 150 units at \$15 each (Total Cost = \$2,250)

Here's how to calculate the weighted average cost:

  1. Total Cost of Goods Available: \$1,000 + \$2,400 + \$2,250 = \$5,650
  2. Total Units Available: 100 + 200 + 150 = 450 units
  3. Weighted Average Cost: \$5,650 / 450 = \$12.56 per unit (approximately)

Therefore, the weighted average cost of each unit in inventory is \$12.56. This cost is then used to value the cost of goods sold and ending inventory.

Why Use Weighted Average Cost?

The weighted average cost method is useful because it:

  • Smooths out price fluctuations: It avoids the impact of large price changes on individual sales.
  • Is relatively simple to calculate: Compared to other inventory costing methods like FIFO (First-In, First-Out) or LIFO (Last-In, First-Out), it's straightforward to implement.
  • Is accepted by GAAP (Generally Accepted Accounting Principles): It's a recognized method for financial reporting.

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