The weighted average method is used to allocate a product’s average cost of production. This method is commonly used in three situations:
- The inventory is mixed and in disarray, so it is not possible to assign a specific cost to each unit.
- The accounting system is not capable of tracking LIFO or FIFO data.
- The inventory is too commoditized.
The calculation is simple. Take the total cost of goods available for sale and divide by the number of units available. When using this calculation, the cost of goods available for sale is equal to the beginning inventory plus net purchases.
For example, assume there was a beginning inventory of 150 units that cost $50,000. Next, assume 30 units were purchased for $7,500.
Total units = 180Total cost = $57,500Average cost = $319.44