Weighted average method | weighted average costing
/What is the Weighted Average Costing Method?
The weighted average method is used to assign the average cost of production to a product. Weighted average costing is commonly used in the following situations:
Inventory items are so intermingled that it is impossible to assign a specific cost to an individual unit;
The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory layers; or
Inventory items are so commoditized (i.e., identical to each other) that there is no way to assign a cost to an individual unit.
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.
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How to Calculate Weighted Average Cost
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.
Example of Weighted Average Costing
Milagro Corporation elects to use the weighted-average method for the month of May. During that month, it records the following transactions:
Quantity Change |
Actual Unit Cost |
Actual Total Cost |
|
Beginning inventory | +150 | $220 | $33,000 |
Sale | -125 | -- | -- |
Purchase | +200 | 270 | 54,000 |
Sale | -150 | -- | -- |
Purchase | +100 | 290 | 29,000 |
Ending inventory | = 175 |