Weighted average cost
Weighted average cost values every unit of a product at the same blended figure, the average of what was paid weighted by how many units were bought at each price.
Updated
- Formula
- average cost = (units on hand × current cost + units received × new cost) ÷ total units
- Also called
- moving average cost, average cost method, WAC
Worked example
You hold 100 throws at $19.80 and receive 300 more at $21.40.
(100 × $19.80 + 300 × $21.40) ÷ 400 = $21.00
All 400 units are now carried at $21.00. The next delivery is blended with that figure in the same way.
What it does
A price rise reaches your cost gradually, in proportion to how much old stock you still hold. That keeps margins steady from one delivery to the next, and it means the cost on file is neither of the prices you were actually charged.
Compared with FIFO
Under FIFO the first 100 units sold would cost $19.80 each and the next 300 would cost $21.40. Under weighted average all 400 cost $21.00. Over the whole 400 units the total is the same, $8,400; the difference is which month the higher cost lands in.
What it needs
The calculation depends on the quantity on hand at the moment each delivery arrives, so it belongs to tools that manage purchase orders and stock receipts. A cost record that is only dated, with no quantities, cannot derive it.
Questions
- Is weighted average cost better than FIFO?
- Neither is better in general. Average cost is simpler and smooths price changes. FIFO tracks each batch and follows the physical flow of most stock. Use the method your accounts use.
- Does Cogsy calculate a weighted average?
- No. Cogsy records costs by date and source and does not track stock quantities. If you cost on a weighted average, calculate it when stock arrives and record the result as the new unit cost from that date.
Related
Glossary
FIFO (first in, first out)FIFO assumes the oldest stock is sold first, so each sale takes the cost of the earliest batch still on hand. A worked example and a comparison with average cost.
Glossary
Unit costUnit cost is what one unit of a product costs you to buy or make. How to calculate it for bought and made goods, and what belongs in it.
Glossary
Cost of goods sold (COGS)COGS is the direct cost of the products you sold in a period. What it includes, what it leaves out, the formula, and a worked example for a Shopify store.