Weighted Average Method – Inventory Cost Formula

Weighted Average Method

Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items produced or purchased during the period. The average may be Weighted Average - Periodic or Weighted Average - Perpetual.

Weighted Average - Periodic

Under weighted average-periodic, the weighted average cost is determined at the end of the period using the following formula:

Total Goods Available for sale= Beginning Inventory + Net Purchases

The weighted average unit cost is then multiplied by the quantity sold during the period to determine the cost of goods sold or by the quantity of inventory on hand to determine ending inventory.

Weighted Average - Perpetual

When used in conjunction with the perpetual system, the weighted average method is popularly known as the moving average method.

This is in accordance with PAS 2, PARAGRAPH 27, which provides that the weighted average may be calculated on a periodic basis or as each additional shipment is received depending upon the circumstances of the entity.

Under this method, a new weighted average unit cost must be computed after every purchase and purchase return. Thus, the total cost of goods available after purchase and purchase return is divided by the total units available for sale at this time to get a new weighted average unit cost. Such new weighted average unit cost is then multiplied by the units on hand to get the inventory cost.

Weighted Average Method Sample Problem

Justine CO. is a wholesaler of Drums. The activity for the product Drums during March is shown below:

SOLUTION: Weighted Average - Periodic

The weighted average unit cost is multiplied to quantities as follows:

SOLUTION: Weighted Average - Perpetual

Observe that a new average unit cost is computed by dividing total goods available for sale in units after every purchase. The computed moving average unit costs are used in computing for cost of goods sold.

Note that under the weighted average perpetual, sales returns are reverted back to inventory at the average unit cost computed before the related sale.

Cost of Goods Sold is derived from the table as follows: