FIFO and LIFO both guess which units sell first. Weighted average cost skips that guess. It treats every unit as the same and averages the cost across everything you have on hand.

How the Method Works

Each time you buy new inventory, you recalculate the weighted average cost per unit. The formula is simple:

Weighted Average Cost = Total Cost of Inventory ÷ Total Units on Hand

You then apply that average cost to every unit you sell. It doesn't matter which batch it actually came from.

A Worked Example

Say you buy 100 units at $10 each, for $1,000 total. Then you buy 100 more at $12 each, for $1,200 total. Total cost is $2,200 across 200 units, so the weighted average cost is $11 per unit.

If you sell 120 units, cost of goods sold is 120 × $11 = $1,320. The 80 units left in inventory are valued at $11 each, for $880 total.

Why Businesses Use This Method

Weighted average cost is easier to use than FIFO or LIFO when your items are all the same. Think of bulk goods or raw materials mixed together in storage. This method also smooths out price swings. It blends costs instead of tracking each batch separately.

When It's Less Useful

Sometimes batches really do differ. Perishable goods with different sell-by dates are one example. So are items where the exact cost of each one matters on its own. In these cases, FIFO or specific identification works better. It gives a more accurate picture than an averaged cost.

Key Takeaways

Weighted average cost blends all purchase costs into one per-unit average. It doesn't assume any specific order of sale. The method is simple to apply. It works well for similar, bulk-style inventory.

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