Calculating the weighted average costWhen using the weighted average method, you divide the cost of goods available for sale by the number of units available for sale, which yields the weighted-average cost per unit. In this calculation, the cost of goods available for sale is the sum of beginning inventory and net purchases. This weighted average figure is then used to assign a cost to both ending inventory and the COGS. Show
Weighted average cost exampleCorporation A uses the weighted average method and during the month of June it records the following transactions: 
The result of using the weighted average cost method is that the recorded amount of on-hand inventory will represent a value somewhere between the oldest and most recent stock units purchased. Equally, the COGS will reflect a cost somewhere between that of the oldest and newest units that were sold during the period. Benefits of the weighted average cost methodA significant advantage of using the weighted average cost method that it is the simplest way to track inventory expense. You can store inventory stock without the need to designate which batch it belongs to and you don’t need to trace the original cost before pricing items, simply marking up the average price of the stock units. The calculation used to determine the weighted average cost is also easier than that of other valuation methods which take multiple steps to calculate the inventory value or COGS. Using this method also requires less paperwork. The weighted average cost method only requires a single cost calculation and uses this cost for all other calculations, requiring only a single record documenting the calculation. There is no need to maintain detailed records for each purchase, only records of the totals. Consistency is another advantage because once the product cost is calculated, it is used consistently across all stock units. This includes the cost used for the ending inventory value as well as the COGS. Alternative methods such as FIFO and LIFO use a range of costs, depending on the individual costs incurred with each transaction. Finally, it costs money to track inventory stock, so whether you are counting manually or using software to track inventory expenses, this method requires fewer labour hours to maintain. Disadvantages of the weighted average cost methodAn issue with the weighted average cost method is when your inventory prices vary widely, where you may not recover the costs of the more expensive units and may even suffering a loss with your sales price. The idea behind the method is that you will make up any loss when you sell the less expensive items. If that doesn’t happen, however, you may end up discontinuing the item, never recovering the losses sustained when selling the pricey units. This method assumes that all units are identical, but this is not always the reality. Newer batches of product may have had upgrades or additional features added and may eligible for a better price than the older stock units. This is particularly problematic when a supplier replaces a product with a new version, giving it the same name as the previous version. Finally, the average cost method is retrospective, in that it looks back over a purchasing period to see what was paid per unit. Weighted Average vs. FIFO vs. LIFO: An OverviewWhen it comes time for businesses to account for their inventory, businesses may use the following three primary accounting methodologies:
Each of these three methodologies relies on a different method of calculating both the inventory of goods and the cost of goods sold. Depending on the situation, each of these systems may be appropriate. Key Takeaways
The weighted average method, which is mainly utilized to assign the average cost of production to a given product, is most commonly employed when inventory items are so intertwined that it becomes difficult to assign a specific cost to an individual unit. This is frequently the case when the inventory items in question are identical to one another. Furthermore, this method assumes a store sells all of its inventories simultaneously. To use the weighted average model, one divides the cost of the goods that are available for sale by the number of those units still on the shelf. This calculation yields the weighted average cost per unit—a figure that can then be used to assign a cost to both ending inventory and the cost of goods sold. While the weighted average method is a generally accepted accounting principle, this system doesn’t have the sophistication needed to track FIFO and LIFO inventories. First In, First Out (FIFO)The first in, first out (FIFO) accounting method relies on a cost flow assumption that removes costs from the inventory account when an item in someone’s inventory has been purchased at varying costs, over time. When a business uses FIFO, the oldest cost of an item in an inventory will be removed first when one of those items is sold. This oldest cost will then be reported on the income statement as part of the cost of goods sold. Last In, First Out (LIFO)The last in, first out (LIFO) accounting method assumes that the latest items bought are the first items to be sold. With this accounting technique, the costs of the oldest products will be reported as inventory. It should be understood that, although LIFO matches the most recent costs with sales on the income statement, the flow of costs does not necessarily have to match the flow of the physical units. Generally speaking, FIFO is preferable in times of rising prices, so that the costs recorded are low, and income is higher. Contrarily, LIFO is preferable in economic climates when tax rates are high because the costs assigned will be higher and income will be lower. Weighted Average vs. FIFO vs. LIFO ExampleConsider this example: Suppose you own a furniture store and you purchase 200 chairs for $10 per unit. The next month, you buy another 300 chairs for $20 per unit. At the end of an accounting period, let's assume you sold 100 total chairs. The weighted average costs, using both FIFO and LIFO considerations are as follows:
Weighted Average Cost
First In, First Out Cost
Last In, First Out Cost
Which of the following statements are true if the weighted average cost?about the weighted average process costing method? If all raw materials are added to production at the beginning of the process, the number of equivalent units in process will equal the total number of individual units worked on during the period.
What is the weighted average method of process costing?In the weighted average cost method, the cost of goods available for sale is divided by the number of units available for sale and is commonly used when inventory items are so melded or identical to each other that it is impossible to assign specific costs to single units.
Which of the following statement is true under process costing?It tracks and assigns both period costs and product costs to units produced. It accumulates product costs by production departments. It assigns manufacturing overhead costs to products only in the last production process. Under process costing, the costs incurred by each department are recorded in: a job cost sheet.
Which of the following is true under the FIFO method?Answer and Explanation: The correct answer is d. In case of rising prices, the FIFO method will report higher inventory balance and low cost of goods sold as compared to the LIFO method.
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