Weighted Average

Weighted Average assigns the same cost to all units
➛ True

Weighted Average reflects only the most recent prices
➛ False

Weighted Average smooths price fluctuations
➛ True

Weighted Average is allowed under IFRS
➛ True

1. Average cost per unit = Total cost ÷ Total units

2. Weighted Average results in lower profit volatility

3. Weighted Average COGS usually falls between FIFO and LIFO

Inventory purchases
40 units @ $5
60 units @ $7

Units sold
50

Tasks
Calculate average cost per unit
Calculate COGS
Calculate Ending Inventory

Step 1 Total Units & Total Cost
Total units = 40 + 60 = 100 units
Total cost = $200 + $420 = $620

Step 2 Average Cost per Unit
620 ÷ 100 = $6.20

Step 3 Calculate COGS
Units sold = 50
50 × $6.20 = $310
COGS = $310

Step 4 Calculate Ending Inventory
Units remaining = 50
50 × $6.20 = $310
Ending Inventory = $310

Choose the best method and explain why

A chemical company producing identical products
➛ Weighted Average - products are identical and costs fluctuate.

A grocery store selling perishable goods
➛ FIFO - ensures older items are sold first.

A company wanting stable profits
➛ Weighted Average - reduces extreme profit swings.

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?
➛ Weighted Average

Why is this method appropriate?
➛ It averages costs and avoids sharp profit fluctuations caused by changing prices.

How does this method affect COGS and profit stability?
➛ COGS and profits remain moderate and more consistent over time.

How is the average cost per unit calculated?
➛ Total inventory cost ÷ total units available

Does Weighted Average use oldest or newest costs only?
➛ Neither - it uses an average of all costs

How does Weighted Average profit compare to FIFO and LIFO?
➛ It falls between FIFO and LIFO

Is Weighted Average allowed under IFRS?
➛ Yes

Name one business that commonly uses Weighted Average.
➛ Manufacturing company | Chemical company | Oil company

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Retail Inventory Method ➧ Here