Weighted Average
Module 4:
Inventory & Costing
Duration:
45-60 minutes
Level:
Beginner to Diploma-Level
Lesson Objectives
➛ Define the Weighted Average inventory valuation method
➛ Explain how the Weighted Average method works
➛ Calculate average cost per unit
➛ Calculate Cost of Goods Sold using Weighted Average
➛ Calculate Ending Inventory using Weighted Average
➛ Compare Weighted Average with FIFO and LIFO
➛ Identify businesses that commonly use the Weighted Average method
Key Vocabulary
➛ Weighted Average
➛ Average Cost per Unit
➛ Cost of Goods Sold
➛ Ending Inventory
➛ Inventory Valuation
➛ Units Available for Sale
➛ Total Inventory Cost
What Is the Weighted Average Method?
The Weighted Average method assigns
➛ The same average cost to all units sold and remaining
➛ Costs based on total inventory cost ÷ total units
It smooths out price fluctuations over time.
Why Businesses Use Weighted Average
The method is preferred because it
➛ Is simple to apply
➛ Reduces extreme profit fluctuations
➛ Works well when inventory items are similar
➛ Is allowed under IFRS and GAAP
Common users
➛ Manufacturing firms
➛ Chemical and oil companies
➛ Businesses with large volumes of identical items
Weighted Average Calculation
Inventory Data
Data
Jan 1
Jan 10
Jan 20
Jan 1
Jan 10
Jan 20
Units
100
200
100
100
200
100
Cost per Unit
$10
$12
$14
$10
$12
$14
Step 1 - Calculate Total Units & Total Cost
Total units =
100 + 200 + 100 = 400 units
Total cost =
100 × $10 = $1,000
200 × $12 = $2,400
100 × $14 = $1,400
Total cost = $4,800
Step 2 - Calculate Average Cost per Unit
Average Cost per Unit =
4,800 ÷ 400 = $12
Step 3 - Calculate COGS
Units sold = 250
250 × $12 = $3,000
COGS = $3,000
Step 4 - Calculate Ending Inventory
Units remaining = 150
150 × $12 = $1,800
Ending Inventory = $1,800
Impact on Financial Statements
Income Statement
➛ COGS is between FIFO and LIFO
➛ Profit is moderate and stable
Balance Sheet
➛ Inventory valued at an average cost
➛ Less volatility in asset values
FIFO vs LIFO vs Weighted Average
Feature
Cost basis
COGS | inflation
Profit
Inventory value
IFRS allowed
Cost basis
COGS | inflation
Profit
Inventory value
IFRS allowed
FIFO
Oldest
Lower
Higher
Higher
Yes
Oldest
Lower
Higher
Higher
Yes
LIFO
Newest
Higher
Lower
Lower
No
Newest
Higher
Lower
Lower
No
Weighted Avarage
Avarage
Medium
Moderate
Avarage
Yes
Avarage
Medium
Moderate
Avarage
Yes
Concept Check
Answer True or False
➛ Weighted Average assigns the same cost to all units
➛ Weighted Average reflects only the most recent prices
➛ Weighted Average smooths price fluctuations
➛ Weighted Average is allowed under IFRS
Fill in the Blanks
1. Average cost per unit = Total ______ ÷ Total ______
2. Weighted Average results in ______ profit volatility
3. Weighted Average COGS usually falls ______ FIFO and LIFO
Calculation Practice
Inventory purchases
40 units @ $5
60 units @ $7
Units sold
50
Tasks
Calculate average cost per unit
Calculate COGS
Calculate Ending Inventory
Method Selection
Choose the best method and explain why
➛ A chemical company producing identical products
➛ A grocery store selling perishable goods
➛ A company wanting stable profits
Mini Case Study
A manufacturing company sells identical products and experiences frequent price changes in raw materials. Management wants a method that avoids extreme profit swings.
Questions
➛ Which inventory valuation method is most suitable?
➛ Why is this method appropriate?
➛ How does this method affect COGS and profit stability?
Quick Quiz
➛ How is the average cost per unit calculated?
➛ Does Weighted Average use oldest or newest costs only?
➛ How does Weighted Average profit compare to FIFO and LIFO?
➛ Is Weighted Average allowed under IFRS?
➛ Name one business that commonly uses Weighted Average.
Answers ➧ Here
Retail Inventory Method ➧ Here