Weighted Average Cost in Inventory Accounting

The weighted average is a cost accounting technique used to evaluate a company’s stock by adding the estimated cost of on-hand inventory to every stock item. 

This means that when evaluating, the Cost Of Goods Sold (COGS) and on-hand inventories are considered the same.

Average costing is not necessarily the ideal cost accounting strategy for all companies because it might have consequences for accounting and tax reporting. However, companies use it since it simplifies cost estimation and bookkeeping.

Usage of Weighted Average Costing

If you buy inventory routinely, the weighted average strategy works effectively. Whenever your inventory turns over quickly, there is usually no gap between average costing or an alternate LIFO pricing technique. 

This strategy is typically employed when inventories are sufficiently similar or identical that assigning precise prices to each unit is impractical. Since inventory is frequently hoarded or blended, making it difficult to discriminate between older and younger items, many industrial companies depend on weighted average costing.

Industries Suited to Weighted Average Costing

Manufacturing isn’t the only sector that can benefit from average costing. Weighted average costing is commonly employed in the agricultural sectors because perishables or other crops produced in meadows and bulk harvested cannot be considered individually. This also applies to various animal-based products.

Weighted average costing simplified cost allocation for these products. Chemical manufacturing and the extraction, collecting and storing of fuels and similar items require the use of weighted average costing in the chemical, gas, and petroleum sectors. Since there is no way to distinguish these products while they are kept together, this technique would be used in manufacturing and selling.

When not to Use Weighted Average Costing?

When merchants or producers buy in large quantities, and there is a considerable time delay between purchases, adopting average costing gives significantly different outcomes than other costing approaches. Also, when batch products are not similar and/or there are considerable price differences between batches, they cannot be accounted for in the same way.