Weighted Average Inventory Accounting - Explained
What is the Weighted Average Cost Method?
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What is Weighted Average Costing?
What is the Weighted Average Method of Inventory Accounting?
The weighted average method takes an average cost for all inventory so that each item sold is expensed at the same amount (the weighted average cost). Conceptually, as the sales occur weighted average computes the average cost per unit of inventory at the time of sale. This allows you to charge this amount to the cost of goods sold.
Example of the Weighted-Average Inventory Method
The weighted-average method requires a calculation of the weighted average cost that can be assigned to each unit sold. So, multiply the number of units by the weighted average cost at the time.
Multiplying the cost x the units purchased and adding them together will give you the total cost of goods. Then divide this by the number of units available for sale. This will give you with weighted average cost across all items of inventory.
Now that I have the weighted average cost per unit, I don't care what each individual item of inventory cost me or the order in which it came into the business. Each item sold will be expensed at this amount.
Note: As you purchase more inventory, the weighted average cost may change. So, you will figure out the weighted average across all inventory at the time of sale.
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