Weighted-average method

Definition

The weighted-average method is an inventory valuation technique used to determine the cost of goods sold and ending inventory under the periodic inventory system. It involves calculating a weighted-average unit cost by dividing the total cost of goods available for sale by the total units available for sale, and then applying this average cost to the units sold and the units remaining in ending inventory.

5 Must Know Facts For Your Next Test

1. The weighted-average method calculates the cost of goods sold and ending inventory based on the average cost of all units available for sale during the period.
2. The weighted-average unit cost is calculated by dividing the total cost of goods available for sale by the total units available for sale.
3. The weighted-average method is often used in the periodic inventory system because it provides a more accurate reflection of the cost of goods sold and ending inventory compared to other methods, such as the first-in, first-out (FIFO) or last-in, first-out (LIFO) methods.
4. The weighted-average method is less sensitive to fluctuations in the cost of goods purchased, as it smooths out the impact of these changes over the entire inventory.
5. The weighted-average method is considered a more objective and unbiased approach to inventory valuation compared to methods that prioritize the timing of purchases, such as FIFO or LIFO.

Review Questions

• Explain how the weighted-average method is used to calculate the cost of goods sold and ending inventory in the periodic inventory system.
  • In the periodic inventory system, the weighted-average method is used to determine the cost of goods sold and ending inventory. The process involves calculating a weighted-average unit cost by dividing the total cost of goods available for sale (beginning inventory plus purchases) by the total units available for sale. This weighted-average unit cost is then applied to the units sold during the period to determine the cost of goods sold, and the remaining units in ending inventory. The weighted-average method provides a more accurate reflection of the cost of goods sold and ending inventory compared to other methods, as it considers the overall cost of all units available for sale rather than prioritizing the timing of purchases.
• Describe how the weighted-average method differs from other inventory valuation methods, such as FIFO and LIFO, in the periodic inventory system.
  • The key difference between the weighted-average method and other inventory valuation methods, such as FIFO and LIFO, is the way they determine the cost of goods sold and ending inventory. The weighted-average method calculates a single, average cost for all units available for sale, whereas FIFO and LIFO methods prioritize the timing of purchases. FIFO assumes the first units purchased are the first ones sold, while LIFO assumes the last units purchased are the first ones sold. These methods can result in different cost of goods sold and ending inventory values, especially in periods of fluctuating costs. The weighted-average method is considered more objective and less sensitive to cost changes, as it smooths out the impact of these changes over the entire inventory.
• Evaluate the advantages and disadvantages of using the weighted-average method for inventory valuation in the periodic inventory system.
  • The weighted-average method has several advantages in the periodic inventory system. It provides a more accurate and unbiased reflection of the cost of goods sold and ending inventory, as it considers the overall cost of all units available for sale. It is also less sensitive to fluctuations in the cost of goods purchased, as it smooths out the impact of these changes over the entire inventory. This can be particularly beneficial in periods of volatile costs. However, a potential disadvantage of the weighted-average method is that it may not align as closely with the actual flow of physical inventory as methods like FIFO or LIFO. Additionally, the weighted-average calculation can be more complex and time-consuming compared to other inventory valuation methods. Overall, the weighted-average method is generally considered a more objective and reliable approach to inventory valuation in the periodic inventory system.

Related terms

Periodic inventory system: A system where inventory counts are performed at the end of an accounting period, and the cost of goods sold is calculated as the difference between the beginning inventory and the cost of goods available for sale.

Cost of goods available for sale: The total cost of merchandise that is available for sale during an accounting period, calculated as the sum of the beginning inventory and the cost of goods purchased.

Ending inventory: The value of the inventory remaining at the end of an accounting period, which is carried forward to the next period as the beginning inventory.