Inventory-costing method that assigns an average cost to units available for sale rather than separating old and new layers.
Weighted average cost is an inventory-costing method that assigns an average cost to units available for sale. Instead of separating older and newer cost layers the way FIFO and LIFO do, it blends costs into one average basis.
The method changes both cost of goods sold and ending inventory. It can smooth price fluctuations and is often easier to apply and explain when inventory units are interchangeable.
Accountants total the cost of units available for sale and divide by the number of units available. That average cost is then used to value both units sold and units still on hand. The calculation may be done periodically or in a moving-average form depending on the inventory system.
A business has:
| Item | Amount |
|---|---|
| 100 units at 10 | 1,000 |
| 100 units at 14 | 1,400 |
| Total cost | 2,400 |
| Average cost per unit | 12 |
If it sells 120 units, cost of goods sold is 1,440 and the remaining 80 units are valued at 960.
Weighted average cost is not the same as FIFO or LIFO and should not be described as a neutral version of either one. It is its own costing approach with its own reporting effects.