Weighted average cost (WAC, also called AVCO) assigns a blended unit cost to interchangeable inventory. A periodic calculation averages the goods available for the accounting period; a perpetual moving average updates when a new receipt changes the available quantity and cost. Neither method determines which physical lot should be picked.
Formula and the two methods
Weighted average unit cost = Cost of goods available / Units available
Periodic COGS = Units sold × Periodic weighted average cost
Ending inventory = Units remaining × Applicable average cost
Use costs and quantities for the same item, unit of measure and period. Returns, adjustments and negative inventory need an explicit policy. Keep full precision during the calculation and round currency for presentation at the end.
Under periodic WAC, all purchases in the period enter one average. Under moving average, each receipt recalculates the cost of the units then available; an earlier sale keeps the average applicable when that sale occurred. The two methods can therefore produce different results from the same purchases and total sales.
The IFRS Foundation's IAS 2 summary describes FIFO and weighted average as cost formulas for ordinarily interchangeable inventory, and specific identification for items that are not interchangeable. The accounting framework and business facts determine the applicable policy; physical lot tracking alone does not select it.
Worked example: preserve precision
Assume one interchangeable item with no tax, returns, loss or additional acquisition costs:
| Event | Units | Unit purchase cost | Purchase cost |
|---|---|---|---|
| Opening stock | 200 | $10.00 | $2,000 |
| First receipt | 150 | $11.00 | $1,650 |
| Second receipt | 100 | $12.50 | $1,250 |
| Total available | 450 | $4,900 |
Sell 200 units after the first receipt and 120 after the second: 320 sold, 130 remaining.
Periodic WAC
Average = $4,900 / 450 = $10.888888…
COGS = 320 × ($4,900 / 450) = $3,484.44
Ending inventory = 130 × ($4,900 / 450) = $1,415.56
The displayed average is $10.89, but multiplying that rounded value would introduce a discrepancy. COGS and ending inventory should reconcile to $4,900.
Perpetual moving average
After the first receipt, the average is $3,650 / 350 = $10.428571… . The first 200-unit sale costs $2,085.714286… and leaves 150 units costing $1,564.285714… .
Add the second receipt's $1,250 to that remaining cost:
New average = ($1,564.285714… + $1,250) / 250 = $11.257142…
Second sale cost = 120 × $11.257142… = $1,350.857142…
Total COGS = $3,436.57
Ending inventory = $1,463.43
Compare with FIFO
FIFO costs the 320 units sold as 200 at $10 and 120 at $11:
| Method | COGS | Ending inventory | Reconciled total |
|---|---|---|---|
| Periodic WAC | $3,484.44 | $1,415.56 | $4,900.00 |
| Moving average | $3,436.57 | $1,463.43 | $4,900.00 |
| FIFO | $3,320.00 | $1,580.00 | $4,900.00 |
FIFO has lower COGS in this rising-price example. The relationship can reverse with falling purchase prices, and the timing of receipts and sales matters for moving average. The accounting method changes cost assignment, not the cash already spent acquiring the goods.
Purchase price, landed cost and recoverable value
An invoice unit price may exclude acquisition costs that belong in inventory under the applicable policy. Suppose the first 150-unit receipt has $225 of eligible allocated freight: its acquisition cost would be ($1,650 + $225) / 150 = $12.50 per unit. That changes the cost pool. Do not include recoverable taxes or general selling expenses automatically; classify charges under the accounting policy before allocating them.
LineNow supports allocation of shipping and other order charges, including quantity, value and manual allocation choices. Review the allocation on an actual receipt and the accounting handoff. That capability does not establish that every downstream ledger maintains a perpetual WAC valuation or recognizes COGS automatically.
WAC also does not eliminate impairment or loss records. A blended cost is not evidence that damaged or obsolete stock can be sold for that amount. Keep the stock condition, quantity adjustment and accounting valuation decision traceable.
Choosing and operating the policy
- Decide with the accounting owner whether the item needs specific identification or an interchangeable-item cost formula.
- Keep receipt units, pack conversions, purchase cost and allocable charges consistent.
- Test a partial receipt, a return, a later price correction and a sale between two receipts.
- Reconcile opening cost plus additions and adjustments to COGS plus closing inventory.
- Maintain expiry, lot and picking controls separately from the valuation method.
Related
- FIFO, FEFO, and LIFO: Inventory Valuation Methods and Picking Policies
- Cost of Goods Sold (COGS): Formula, Benchmarks, and Why Procurement Controls It
- Landed Cost: Formula, What It Includes, and How It Changes Your Procurement Math
- Purchase Price Variance (PPV): Formula, Causes, and Why Procurement Decides It
- ABC Inventory Analysis: Classify SKUs, Set Policy by Tier
- Carrying Cost (Holding Cost): Formula, Components, and Why Volume Discounts Lose Money