Lessons · Accounting · inventory: weighted average cost
Weighted average cost
Add up everything spent on the units, divide by the number of units, and use that one average cost for every unit sold and every unit left.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
What it is for
Fuel in a tank, grain in a silo, screws in a bin: nobody can say which delivery a given litre came from, so a rule that pretends to is a fiction. One blended cost per unit is the honest answer, and it is the number the owner's stock report will show.
How to think about it
Total cost divided by total units. Then multiply the units sold by that average for cost of goods sold, and the units left for ending inventory. Weight by quantity; never just average the prices.
Worked example
10 at 5 = 50; 30 at 7 = 210 → total 260 for 40 unitsTwo deliveries, unequal sizes.
Average cost = 260 / 40 = 6.50 per unitWeighted by quantity: the bigger delivery pulls the average toward 7.
Sold 12: cost of goods sold = 12 × 6.50 = 78Every unit sold carries the same cost.
Ending inventory = 28 × 6.50 = 182; check 78 + 182 = 260What is left, and the check that nothing was lost.
Your turn
Total cost 450 for the units bought, average cost 7.50. Write the line with the unit count filled in.
Average cost = 450 / = 7.50
Solve one, graded on the server
The trap
Averaging the prices: (5 + 7) / 2 = 6. That ignores that three-quarters of the units cost 7, and it understates cost of goods sold on every sale until the year-end count exposes it.