Weighted Average Method in Accounting: Formula, Examples & Calculator

Weighted Average Method in Accounting

Written by Vicky Sarin, CA, INSEAD | 25+ years post-qualification experience in financial management and accounting

The weighted average method is one of the most practical inventory valuation techniques in accounting. Whether you're preparing for the CPA exam, CMA certification, or managing real business inventory, understanding how to find weighted average is essential.

This comprehensive guide breaks down the weighted average formula, calculation steps, and real-world applications in simple terms.

What is Weighted Average in Accounting?

The weighted average method (also called weighted average cost or WAC) is an inventory valuation approach that assigns a single average cost to all units available for sale. Unlike FIFO or LIFO methods, weighted average treats all inventory as interchangeable.

Key insight: When you calculate weighted average, you're finding the true "blended" cost when purchase prices vary over time.

When to Use the Weighted Average Method

This method works best for:

• Homogeneous products (identical items)
• Large-volume inventory where tracking individual costs is impractical
• Commodities like fuel, grain, or bulk materials
• Manufacturing with raw materials from multiple suppliers

The Weighted Average Formula

The weighted average formula for inventory valuation is:

Weighted Average Cost per Unit = Total Cost of Goods Available for Sale ÷ Total Units Available for Sale

Where:

• Total Cost of Goods Available = Beginning Inventory Value + Purchases
• Total Units Available = Beginning Inventory Units + Purchased Units

Weighted Average Method Example (Step-by-Step)

Example: ABC Company has the following inventory transactions:

Solution:

Step 1: Calculate Total Cost of Goods Available

Total Cost = ₹50,000 + ₹1,10,000 + ₹90,000 = ₹2,50,000

Step 2: Calculate Total Units Available

Total Units = 100 + 200 + 150 = 450 units

Step 3: Apply the Weighted Average Formula

Weighted Average Cost = ₹2,50,000 ÷ 450 = ₹555.56 per unit

Step 4: Calculate COGS and Ending Inventory

• Cost of Goods Sold (300 units) = 300 × ₹555.56 = ₹1,66,668
• Ending Inventory (150 units) = 150 × ₹555.56 = ₹83,334

Weighted Average in Professional Certifications

The weighted average method appears across multiple professional certification exams. Here's how it's tested:

CPA Exam (FAR Section)

The CPA exam tests weighted average in the Financial Accounting and Reporting (FAR) section. Key topics include:

• Periodic vs. Perpetual inventory systems using weighted average
• Impact on COGS and gross profit calculations
• Comparison with FIFO under US GAAP

CMA Certification (Part 1)

The CMA exam covers weighted average in cost accounting and process costing. Focus areas:

• Process costing with weighted average method
• Equivalent units calculation
• Cost allocation between completed units and WIP

ACCA (Financial Reporting - FR)

Under ACCA's Financial Reporting paper, weighted average is tested per IAS 2 Inventories:

• IAS 2 permits only FIFO and Weighted Average (not LIFO)
• Consistent application to similar inventory items
• Lower of cost and net realisable value adjustments

CFA Level I (Financial Reporting)

CFA candidates encounter weighted average when studying inventory valuation methods and their impact on financial ratios.

Weighted Average vs FIFO vs LIFO

Periodic vs Perpetual Weighted Average

Periodic System

Calculates weighted average at the end of the accounting period using all purchases.

Perpetual System (Moving Average)

Recalculates weighted average after each purchase, providing real-time inventory costs.

FAQs on Weighted Average Method

What is the weighted average formula in simple terms?

Divide the total cost of all inventory by the total number of units. This gives you a single average cost per unit that applies to all items sold or remaining in stock.

Why use weighted average instead of FIFO?

Weighted average simplifies record-keeping for homogeneous products and provides a smoother cost flow that reduces profit volatility from price fluctuations.

Is weighted average allowed under IFRS?

Yes. IAS 2 Inventories permits both FIFO and weighted average cost formulas. LIFO is prohibited under IFRS.

How does weighted average affect taxes?

During inflation, weighted average produces COGS between FIFO (lowest) and LIFO (highest), resulting in moderate tax liability compared to other methods.

Weighted Average in Professional Certifications

The weighted average method appears across multiple professional certification exams. Here's how it's tested:

CPA Exam (FAR Section)

The CPA exam tests weighted average in the Financial Accounting and Reporting (FAR) section. Key topics include:

• Periodic vs. Perpetual inventory systems using weighted average
• Impact on COGS and gross profit calculations
• Comparison with FIFO under US GAAP

CMA Certification (Part 1)

The CMA exam covers weighted average in cost accounting and process costing. Focus areas:

• Process costing with weighted average method
• Equivalent units calculation
• Cost allocation between completed units and WIP

ACCA (Financial Reporting - FR)

Under ACCA's Financial Reporting paper, weighted average is tested per IAS 2 Inventories:

• IAS 2 permits only FIFO and Weighted Average (not LIFO)
• Consistent application to similar inventory items
• Lower of cost and net realisable value adjustments

CFA Level I (Financial Reporting)

CFA candidates encounter weighted average when studying inventory valuation methods and their impact on financial ratios and comparability across companies using different methods.

CIA Exam (Part 3)

Internal auditors need to understand weighted average for auditing inventory valuations, verifying COGS calculations, and assessing internal controls over inventory management.

Start your journey to becoming a certified accounting professional. Explore our CPA review course or CMA certification program for comprehensive exam preparation.