Weighted average cost method
Weighted average cost method is a way to value stock (inventory). It works out one average cost per unit from all purchases you hold. You then use that average to record the cost of sales and the value of closing stock. It smooths price changes and suits businesses that sell many similar items.
Simple average cost example
Buy 10 units at 5 and 5 units at 7. The weighted average cost is (10×5 + 5×7) ÷ 15 = 5.67 per unit. Use 5.67 to cost sales and value remaining units until the next recalculation.
There are two common ways to apply the average. One updates the average after each purchase. The other calculates one average for a whole period. The choice mainly changes the timing of costs in profit, not the total over time.
Two ways to apply weighted average cost:
- Perpetual (moving) average: Recalculate after every purchase and use the new rate for the next sales.
- Periodic average: Calculate one average for the period from all purchases and apply it to all sales in that period.
