What Is Weighted Average Cost?
How the weighted average inventory method works, with a worked example.
Home › Accounting Glossary › Weighted Average Cost
| Compare with | FIFO |
|---|---|
| Allowed under IFRS | Yes |
| Topic | Financial accounting · Inventory |
Weighted average cost in plain English
Instead of tracking which batch each unit came from, this method blends all purchases into one average price. It smooths out price changes, so profit is less affected by the timing of purchases.
Worked example
A shop buys 100 units at 10 and 100 units at 12, and sells 150 units (the same data as the FIFO example).
| Total cost (1,000 + 1,200) | 2,200 |
| Total units | 200 |
| Average cost per unit (2,200 ÷ 200) | 11.00 |
| Cost of goods sold (150 × 11) | 1,650 |
| Closing inventory (50 × 11) | 550 |
Compare with FIFO: cost of goods sold was 1,600 and closing inventory 600. With rising prices, weighted average gives a slightly lower profit.
- Averaging the unit prices (10 and 12) instead of weighting by quantity. Here the quantities are equal, but usually they are not.
- Mixing periodic and perpetual methods. A perpetual (moving) average recalculates after every purchase.
Frequently asked questions
What is the difference between weighted average and FIFO?
FIFO assigns the oldest costs to goods sold. Weighted average gives every unit the same blended cost.
What is a moving average?
A version of weighted average that recalculates the average cost each time new stock is bought.
Which method gives a higher profit when prices rise?
FIFO usually does, because older, cheaper costs are charged to cost of goods sold.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.