Explain What Is Weighted Average Cost?

Explain What Is Weighted Average Cost?
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1 Answer

Answer :

A weighted inventory average determines the average cost of all inventory items based on the inventory items' individual cost basis and the quantity of each item held in inventory.
When a business purchases items for inventory, the business may pay different prices for the inventory items. This price differential can apply to both different inventory items and the same inventory items purchased at different times.
The average cost is computed by dividing the total cost of goods available for sale by the total units available for sale. This gives a weighted-average unit cost that is applied to the units in the ending inventory.
Weighted Average Unit Cost = Total Cost of Inventory / Total Units in Inventory
For Ex:
Lets say, we buy item A for 10 AED. We have 10 qty of Item A.
Therefore, total cost of Item A is 10 x 10 = 100 AED.
In that we sold 3 items. 7 qty left in stock. Total cost of those 7 items = 7 x 10 = 70 AED.
After 3 months, item A cost is reduced to 8 AED. And then we bought 10 more for 8 AED.
Therefore, total cost = 8 x 10 = 80 AED.
Now, we have 7 items bought for 10 AED and 10 items bought for 8 AED.
Total 17 items.
Therefore total cost = 70 AED + 80 AED = 150 AED.
Now, when we calculate the weighted average cost of the 17 items which are to be sold = 150
AED/17 = 8.82 AED.
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