6.08 How the Weighted Average Costing Calculate?

Under the weighted average inventory method, the cost of goods available for sale (beginning inventory plus net purchases) is divided by the number of units available for sale to obtain a weighted-average cost per unit. Ending inventory and cost of goods sold are then priced at this average cost.

Weighted average costing is commonly used in situations where:

- Inventory items are so intermingled that it is impossible to assign a specific cost to an individual unit.

- The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory layers.

- Inventory items are so commoditized (i.e., identical to each other) that there is no way to assign a cost to an individual unit.

The net result of using weighted average costing is that the recorded amount of inventory on hand represents a value somewhere between the oldest and newest units purchased into stock. Similarly, the cost of goods sold will reflect a cost somewhere between that of the oldest and newest units that were sold during the period.

Weighted Average Costing Example