Glossary

Weighted average cost

Definition

Weighted average cost is an inventory costing method that values every unit issued at the average cost of the units available, weighted by quantity. In a perpetual system the average is recalculated after each receipt, which is called the moving weighted average; in a periodic system it is calculated once for the whole period.

How it works

The moving average changes only when goods come in at a different cost. Issues do not change it, they simply take units out at the current average. This makes the method easy to follow on an item card and smooths out price swings between purchases.

The periodic version divides the total cost of opening stock and all purchases by the total units available, and applies that single rate to every issue in the period. It is simpler to compute by hand but cannot value an issue until the period ends.

IAS 2 permits weighted average for interchangeable items. In Ledgeriano items set to moving weighted average are revalued on every receipt, landed costs included, and issues post at the current average automatically.

Formula

Moving average after a receipt = (Value on hand + Value received) ÷ (Units on hand + Units received)

Issue value = Units issued × Current average

Example: moving weighted average on an item card

Opening stock is 100 units at 10. The company receives 200 units at 12, issues 150, then receives 100 at 13.

Example: moving weighted average on an item card
Movement	Units	Unit cost	Value	Balance units	Balance value	Average
Opening	100	10.00	1,000	100	1,000	10.00
Receipt	200	12.00	2,400	300	3,400	11.33
Issue	-150	11.33	-1,700	150	1,700	11.33
Receipt	100	13.00	1,300	250	3,000	12.00

Related terms

FIFO (first in, first out)
FIFO is an inventory cost formula that assumes the oldest units are issued first, so cost of sales uses older prices and closing stock is valued at the most recent ones. IAS 2 permits it for interchangeable items.
Standard cost
A standard cost is a predetermined cost per unit for materials, labour and overhead. Inventory moves at the standard, and the differences from actual cost are recorded as variances, which IAS 2 accepts when the result approximates actual cost.
Net realisable value
Net realisable value is the estimated selling price of inventory minus the costs to complete and sell it. Inventory is carried at the lower of cost and net realisable value, so damaged or obsolete stock is written down.
Work in progress (WIP)
Work in progress is the cost of products that have entered production but are not finished: materials issued plus labour and overhead absorbed so far. It is an inventory account on the balance sheet.

Guides

Free calculators

FIFO vs weighted average calculator

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FAQ

Questions about Weighted average cost

Does an issue change the weighted average cost?

No. An issue removes units at the current average, so the average of the remaining units stays the same. Only receipts at a different cost, returns or revaluations change it.

Which is more common, FIFO or weighted average?

Both are widely used. Weighted average is common for commodities and mixed bulk goods; FIFO for perishable or dated goods where stock really does rotate.

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