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The Weighted Average Method | Weighted Average

Costing

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The weighted average method is used to assign the average cost of production to a product.
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Weighted average costing is commonly used in situations where:

Accounting Controls

Inventory items are so intermingled that it is impossible to assign a specific cost to an

Accounting for Managers

individual unit.

Accounting Procedures

The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory

Bookkeeping Guidebook

layers.

Budgeting

Inventory items are so commoditized (i.e., identical to each other) that there is no way

Business Ratios

to assign a cost to an individual unit.

Cash Management
CFO Guidebook
Closing the Books
Controller Guidebook
Corporate Finance
Cost Accounting
Cost Management Guidebook
Credit & Collection Guidebook
Financial Analysis
Fixed Asset Accounting
GAAP Guidebook
Hospitality Accounting
IFRS Guidebook
Interpretation of Financials
Inventory Accounting
Investor Relations
Lean Accounting Guidebook
Mergers & Acquisitions
Nonprofit Accounting
Payables Management
Payroll Management

When using the weighted average method, divide the cost of goods available for sale by the
number of units available for sale, which yields the weighted-average cost per unit. In this
calculation, the cost
of goods available for sale is the sum of beginning inventory and net

purchases. You then use this weighted-average figure to assign a cost to

both ending
inventory and the cost of goods sold.
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.
The weighted average method is allowed under both generally accepted accounting
principles and international financial reporting standards.
Weighted Average Costing Example
Milagro Corporation elects to use the weighted-average method for the
month of May.
During that month, it records the following transactions:

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Constraint Management

Beginning inventory

Human Resources Guidebook

Sale

Inventory Management

Purchase

Purchasing Guidebook

Sale
Purchase
Ending inventory

Quantity

Actual

Actual

Change

Unit Cost

Total Cost

+150

$220

$33,000

-125

--

--

+200

270

54,000

-150

--

--

+100

290

29,000

= 175

The actual total cost of all purchased or beginning inventory units in the preceding table is
$116,000 ($33,000 + $54,000 + $29,000). The total of all purchased or beginning
inventory units is 450 (150 beginning inventory + 300 purchased). The weighted average
cost per unit
is therefore $257.78 ($116,000 450 units.)

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Weighted Average Method - AccountingTools

The ending inventory valuation is $45,112 (175 units $257.78 weighted average cost),
while the cost of goods sold valuation is $70,890 (275 units $257.78 weighted average
cost). The sum of these two amounts (less a rounding error) equals the $116,000 total

actual cost of all purchases and beginning inventory.

In the preceding example, if Milagro used a perpetual inventory system to record its
inventory transactions, it would have to recompute the weighted average after every
purchase. The following table uses the same information in the preceding example to show
the recomputations:
Inventory
Inventory

Moving-

Total

Average

Cost of

Units
on Hand

Purchases

Sales

Cost

Unit Cost

Beginning inventory

150

$ --

$ --

$33,000

$220.00

Sale (125 units @ $220)

25

--

27,500

5,500

220.00

Purchase (200 units @

225

54,000

--

59,500

264.44

75

--

39,666

19,834

264.44

175

29,000

--

48,834

279.05

$270)
Sale (150 units @
$264.44)
Purchase (100 units @
$290)
Note that the cost of goods sold of $67,166 and the ending inventory balance of $48,834
equal $116,000, which matches the total of the costs in the original example. Thus, the
totals are the same, but the moving weighted average calculation results in slight
differences in
the apportionment of costs between the cost of goods sold and ending

inventory.
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?

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