Weighted-average cost flow assumption
/What is the Weighted-Average Cost Flow Assumption?
The weighted-average cost flow assumption is a costing method that is used to assign costs to inventory and the cost of goods sold. Under this approach, the cost of goods available for sale is divided by the number of units produced in the period to arrive at an average cost per unit. This amount is then assigned to the units sold in the period and the units remaining in stock. This method is only used when the periodic inventory system is in place.
How to Use the Weighted-Average Cost Flow Assumption
There is a specific calculation process required if you are to use the weighted-average cost flow assumption. The key points are as follows:
Calculate the weighted-average cost. The weighted-average cost is determined by dividing the total number of units available for sale into the total cost of the items available for sale.
Calculate the cost of goods sold. Multiply the weighted-average cost from the first step by the number of units sold during the reporting period. This gives you the cost of goods sold.
Calculate the ending inventory balance. Multiply the weighted-average cost from the first step by the ending units in stock. This gives you the ending inventory cost.