Weighted-average cost method

Definition

The weighted-average cost method assigns an average cost to each unit of inventory, based on the total cost of goods available for sale divided by the total units available. It smooths out price fluctuations over accounting periods.

5 Must Know Facts For Your Next Test

1. It is one of the four primary inventory valuation methods alongside FIFO, LIFO, and Specific Identification.
2. Under this method, the cost of ending inventory and the cost of goods sold are based on a weighted average unit cost.
3. The weighted-average cost is recalculated after each purchase in a perpetual system or at the end of an accounting period in a periodic system.
4. This method results in a middle-ground effect on income and taxes compared to FIFO and LIFO during inflationary periods.
5. It is commonly used when inventory items are indistinguishable from each other.

Review Questions

Related terms

FIFO:

First-In, First-Out method where older inventory costs are assigned to COGS first.

LIFO:

Last-In, First-Out method where newer inventory costs are assigned to COGS first.

Specific Identification Method:

Tracks the actual cost of each specific item individually for COGS calculation.