weighted average cost
An inventory costing method calculating an average cost per unit by dividing total cost of goods available for sale by total units available.
Example
“With purchases at $10, $12, and $14, the weighted average cost of $12 was used for all units sold.”
Memory Tip
WEIGHTED AVERAGE COST = blend all purchase prices into one average. Middle ground between FIFO and LIFO.
Why It Matters
Weighted average cost affects how much profit a business reports and how much income tax it owes, which ultimately impacts the prices consumers pay for products. Understanding this method helps investors evaluate whether a company is managing its inventory efficiently and generating realistic financial statements.
Common Misconception
Many people assume weighted average cost is the same as simply adding up all prices and dividing by the number of items, but it actually accounts for how many units were purchased at each price point. This method gives more weight to purchases of larger quantities, which is why it is called weighted average.
In Practice
A bookstore buys 100 copies of a book at 10 dollars each and then 50 copies at 12 dollars each for a total of 1,200 dollars plus 600 dollars. The weighted average cost per unit is 1,800 dollars divided by 150 units, which equals 12 dollars per book, and this single average price is used to calculate the cost of all books sold until the next purchase.
Etymology
WEIGHTED (proportional to quantity) AVERAGE COST. The AVERAGE COST WEIGHTED by quantity purchased.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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