Weighted-Average Cost per Unit

Definition

Weighted-Average Cost per Unit is a method used to calculate the cost of goods sold and ending inventory in a periodic inventory system. It involves determining the average cost per unit of all goods available for sale during a given period, taking into account the varying costs of the units purchased throughout that period.

5 Must Know Facts For Your Next Test

1. The Weighted-Average Cost per Unit is calculated by dividing the total cost of goods available for sale by the total number of units available for sale.
2. This method assumes that each unit sold during the period has the same cost, which is the average cost of all units available for sale.
3. The Weighted-Average Cost per Unit remains the same for all units sold during the period, regardless of when they were purchased.
4. The Weighted-Average Cost per Unit is used to determine the cost of goods sold and the value of the ending inventory in a periodic inventory system.
5. The Weighted-Average Cost per Unit is often preferred over other inventory costing methods, such as FIFO (First-In, First-Out) or LIFO (Last-In, First-Out), because it smooths out the impact of price fluctuations on the financial statements.

Review Questions

• Explain how the Weighted-Average Cost per Unit is calculated and how it is used to determine the Cost of Goods Sold and Ending Inventory in a periodic inventory system.
  • The Weighted-Average Cost per Unit is calculated by dividing the total cost of goods available for sale by the total number of units available for sale during the accounting period. This average cost per unit is then used to determine the Cost of Goods Sold and the value of the Ending Inventory. The Cost of Goods Sold is calculated by multiplying the Weighted-Average Cost per Unit by the number of units sold, while the Ending Inventory is calculated by multiplying the Weighted-Average Cost per Unit by the number of units remaining in inventory at the end of the period.
• Compare and contrast the Weighted-Average Cost per Unit method with other inventory costing methods, such as FIFO and LIFO, in terms of their impact on the financial statements.
  • The Weighted-Average Cost per Unit method differs from FIFO and LIFO in that it assumes each unit sold has the same cost, which is the average cost of all units available for sale. This means that the Weighted-Average Cost per Unit is not affected by the timing of purchases, unlike FIFO and LIFO. As a result, the Weighted-Average Cost per Unit method tends to smooth out the impact of price fluctuations on the financial statements, leading to a more stable Cost of Goods Sold and Ending Inventory values. In contrast, FIFO and LIFO can result in more volatile financial statements, as the Cost of Goods Sold and Ending Inventory values are more closely tied to the timing of purchases.
• Explain why the Weighted-Average Cost per Unit method is often preferred over other inventory costing methods in a periodic inventory system.
  • The Weighted-Average Cost per Unit method is often preferred in a periodic inventory system because it provides a more accurate and stable representation of the cost of goods sold and the value of the ending inventory. Unlike FIFO and LIFO, which can be heavily influenced by the timing of purchases, the Weighted-Average Cost per Unit method smooths out the impact of price fluctuations, resulting in a more consistent and reliable financial reporting. This is particularly important in a periodic inventory system, where the cost of goods sold and ending inventory are only calculated at the end of the accounting period. The Weighted-Average Cost per Unit method helps to minimize the distortion of these values, making the financial statements more informative and useful for decision-making.

Related terms

Periodic Inventory System:

A system where the cost of goods sold and the value of ending inventory are determined at the end of an accounting period, rather than on a continuous basis.

Cost of Goods Sold (COGS): The total cost of the merchandise that a company has sold during a specific period of time.

Ending Inventory:

The value of the goods that remain unsold at the end of an accounting period.