Weighted Average Method (Cost Accounting)

Weighted Average Method Explained

The weighted average method is one of the most common methods of inventory and cost accounting. It is also known as Average Cost Method or AVCO. It is an alternative to FIFO (first in first out) and LIFO (last in first out), which are other commonly used cost accounting methods.

The core idea of the weighted average method is to assume that all units that are currently in the inventory have been purchased at the same price (unit cost).

Weighted Average Method Formula for Unit Cost

Average unit cost under the weighted average method is calculated as weighted average of unit costs of past purchases, according to the following formula:

Weighted average method unit cost formula

… where there have been n purchases of inventory (i = 1, 2, 3, …, n) and:

The weighted average unit cost is simply the total amount that has been paid for the inventory divided by the number of units in the inventory.

The formula is of course the same as the general weighted average formula:

Weighted average formula

… where:

Weighted Average Method Example

There is a small refinery. It buys crude oil and uses it to produce gasoline, diesel, and other oil products.

What has been the cost for the accounting period under the weighted average method?

Average Unit Cost

Total cost for all inventory is the sum of the costs of individual purchases:

10,000 x 85 + 7,000 x 100 + 8,000 x 80 =

= 850,000 + 700,000 + 640,000 =

= USD 2,190,000 for all 25,000 barrels.

Unit cost under the weighted average method is simply the total cost divided by number of units:

2,190,000 / 25,000 = 87.60 USD/barrel

Cost for the Period and Ending Inventory

Out of the total 25,000 barrels, only 22,000 have been used in production and 3,000 remain as inventory for the following accounting period.

The cost in the current accounting period is the average unit cost times number of units used:

87.60 x 22,000 = USD 1,927,200

Ending inventory is the average unit cost times number of units remaining:

87.60 x 3,000 = USD 262,800

… which must be the same as the total cost of all purchases less the cost of the units used in production:

2,190,000 – 1,927,000 = USD 262,800

When to Use Weighted Average Method

The weighted average method is typically used when inventory items are commodities or close to commodities and it is difficult to tell which particular item was purchased when, and therefore difficult to assign specific unit cost. It requires less sophisticated inventory management and accounting than other methods like FIFO or LIFO.


Related pages


what is a straddle positionhedging with putsmacd divergence strategystrike price call optionpercentile calculator standard deviation meanimplied volatility equationrsi indicator settingsmeasure of skewnesswacc debtaapl flash crashhow to calculate median in excelhow to calculate square root in excelhow to find 13f filingsskewness kurtosis normal distributionpercentile standard deviation calculatorexcel kurtosisblack scholes calculatormerits and demerits of central tendencyvix downloadnatural log function in excelweighted index definitionis the market overboughtsample covariance exceldjia divisorcboe vix indexoption delta calculatorskewness statistics formulaexcel normsdists&p 500 vix mid term futures indexbearish stock definitioninverse etncoefficient of skewness exampleyahoo historical priceleveraged inverse vix etfaapl stock historybearish positionformula kurtosisunbiased variance formulaleveraged inverse vix etfetfs listvix symbolimplied volatility vs historical volatilitysum of squared deviationsbroken wing iron condorsquare root multiplierportfolio management advantages and disadvantagesportfolio weight calculatorcboe vix calculationblack scholes model definitionstock option price calculatorvix historical chartcboe indicescompute average in excelhow to calculate option deltahow do i calculate variance in excelcovered call payoffmacd divergence strategymsft financeetf short sp500historical vixoptions implied volatility calculatorput option strike pricewhat is the meaning of rsisec form 13frealized rate of return calculatorreal time vixblack & scholes modelinverse vix etfinterpreting skewness and kurtosiscboe volatility futuresindexation calculator13 f filingsn d1 black scholescomputation formula for sample variancestocks at all time lows