Weighted Average Cost is a method used to work out the average cost of items in stock, based on how much they cost and how many were bought.
Instead of tracking each item individually, this method blends the costs together. It’s useful when items are bought at different prices but are stored together and sold without knowing which batch they came from.
How It Works
The formula is:
Weighted Average Cost = Total Cost of Goods Available ÷ Total Units Available
This gives a single average cost per unit, which is then used for pricing, stock valuation, and calculating profit.
Example
If a company buys:
- 100 units at £5 each
- 200 units at £6 each
The total cost is £1,700. The total units are 300.
£1,700 ÷ 300 = £5.67 per unit
So, every unit is valued at £5.67, no matter what it originally cost.
When to Use It
- When stock is mixed and sold without tracking batches
- To smooth out cost changes
- For simple inventory and accounting
Why It’s Helpful
- Keeps pricing consistent
- Avoids overcomplicating stock calculations
- Reduces impact of price swings on profit reporting