Weighted-Average Method

Definition

The weighted-average method is an inventory costing technique used to determine the cost of goods sold and the value of ending inventory. It calculates the average cost per unit by weighting the costs of units available for sale based on the quantities and costs of units purchased at different times.

5 Must Know Facts For Your Next Test

1. The weighted-average method calculates the average cost per unit by dividing the total cost of units available for sale by the total number of units available for sale.
2. The weighted-average method is often used when the costs of units purchased at different times are similar, and it provides a more stable cost per unit compared to other inventory costing methods.
3. The weighted-average method can be used in both periodic and perpetual inventory systems, and it is commonly used in manufacturing and retail industries.
4. The weighted-average method is useful for determining the cost of goods sold and the value of ending inventory, which are important for financial reporting and decision-making.
5. The weighted-average method can be applied to both physical units and dollar amounts, and it is a relatively simple and straightforward inventory costing method.

Review Questions

• Explain how the weighted-average method is used to compute equivalent units and total cost of production in an initial processing stage.
  • In the initial processing stage, the weighted-average method is used to calculate the equivalent units of production and the total cost of production. The equivalent units represent the number of complete units that could have been produced from the total direct materials, direct labor, and manufacturing overhead costs incurred during the period. To compute the equivalent units, the weighted-average method considers the stage of completion of the units in the beginning inventory and the units started and completed during the period. The total cost of production is then divided by the total equivalent units to determine the weighted-average cost per equivalent unit, which is used to value the cost of goods sold and the ending inventory.
• Describe how the weighted-average method affects the reporting of cost of goods sold and ending inventory on the financial statements.
  • The weighted-average method impacts the reporting of cost of goods sold and ending inventory on the financial statements. By using the average cost per unit, the weighted-average method provides a more stable and consistent cost flow, which can result in less volatility in the cost of goods sold and the ending inventory values compared to other inventory costing methods like FIFO or LIFO. This can be beneficial for financial reporting and decision-making, as it can lead to more predictable and less fluctuating gross profit and inventory balances. However, the weighted-average method may not always reflect the current market prices of the inventory, which can be a limitation in some situations.
• Analyze the advantages and disadvantages of using the weighted-average method for inventory costing in the context of an initial processing stage.
  • The weighted-average method has both advantages and disadvantages in the context of an initial processing stage. Advantages include its simplicity, the stability it provides in cost per unit, and its applicability to both periodic and perpetual inventory systems. The weighted-average method can also be useful when the costs of units purchased at different times are similar, as it provides a more representative average cost. However, a potential disadvantage is that the weighted-average method may not accurately reflect the current market value of the inventory, especially in periods of rapidly changing costs. Additionally, the weighted-average method does not provide the same level of traceability to specific units as other methods like FIFO or specific identification. In the initial processing stage, the weighted-average method can be an appropriate choice when consistency and simplicity are prioritized over precise cost flow tracking.

Related terms

Inventory Costing: The process of determining the cost of goods sold and the value of ending inventory using various methods such as the weighted-average method, first-in, first-out (FIFO), and last-in, first-out (LIFO).

Cost of Goods Sold (COGS): The total cost of the inventory items that have been sold during a specific period, calculated as the beginning inventory plus purchases or production costs, less the ending inventory.

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