What Is Weighted Average Cost?
Also known as: Average Cost, Moving Average Cost, WAC, Average Costing
Definition
Weighted average cost values inventory at one blended unit cost: total cost of units on hand divided by total quantity. In a perpetual system the average is recalculated after every receipt, and issues leave at the current average.
Weighted Average Cost Explained
Under a moving average method, each receipt updates the unit cost as (existing quantity x existing cost + received quantity x received cost) divided by the new total quantity. Issues and sales relieve inventory at that current average. Periodic weighted average does the same calculation once at period end using all purchases in the period.
Average costing smooths price swings, which makes margins steadier than FIFO or actual lot costing and keeps the item master simple: one cost per item and warehouse. It is a common choice for commodity raw materials, fasteners, chemicals and other interchangeable stock where tracking each receipt layer adds effort without insight.
ERPs implement it as a per-item cost method. NetSuite offers average costing with location-level averages, SyteLine supports an average cost type on the item, and Infor LN supports average-based methods with its cost component structure. A known gotcha is negative on-hand: if stock is issued before the receipt is posted, the average is recalculated against an artificial quantity and can produce distorted costs that persist after the receipt arrives. Enforce receiving discipline or block negative inventory.
Average costing is a poor fit when units differ materially in cost, such as serialized assemblies, or when contract rules (for example government cost accounting) require traceable actual cost. In those cases use lot, serial or actual costing. Standard cost with variance tracking is the usual alternative when you want to manage to a target cost rather than smooth history.
Why It Matters
- It dampens purchase price volatility, so reported margins reflect trend rather than a single large receipt.
- It needs far fewer cost layers than FIFO, which reduces master data and reconciliation work.
- Errors such as negative inventory or late receipts silently skew the average and are hard to spot afterwards.
- Method choice affects COGS, inventory value and the audit trail, so it must be a documented policy.
In Practice
Example: you hold 200 kg at 5.00 and receive 100 kg at 8.00. New average is (200 x 5 + 100 x 8) / 300 = 6.00 per kg. Issuing 150 kg then relieves 900 of inventory, leaving 150 kg valued at 900.
Frequently Asked Questions
How do you calculate weighted average cost?
Divide the total cost of units on hand by the total quantity on hand. After each receipt, add the new cost and quantity to the existing balances and divide again.
What is the difference between moving average and periodic weighted average?
Moving average recalculates after every receipt in a perpetual system. Periodic weighted average calculates one average at period end from all purchases and opening stock.
Why does negative inventory distort average cost?
Issuing before the receipt is posted forces the system to cost against a quantity that does not exist. The average is recalculated from that distorted base and the error can persist.
Is average costing allowed under GAAP and IFRS?
Yes. Both permit weighted average cost. Whatever method you choose should be applied consistently and disclosed.
Related Terms
FIFO Costing (First-In, First-Out)
FIFO costing is an inventory valuation method that assigns the cost of the oldest receipts to units issued or sold first, leaving the most recent purchase costs in ending inventory. It tracks cost in layers by receipt.
Standard Cost
Standard cost is a predetermined per-unit cost for material, labor, and overhead, set in advance and used to value inventory and transactions. Differences between standard and actual are captured as variances that isolate where cost deviated.
Actual Cost
Actual cost is the real cost incurred to produce or acquire an item, accumulated from the specific material prices paid, labor hours reported, and overhead applied, rather than from a predetermined standard.
Landed Cost
Landed cost is the total cost of bringing purchased goods into inventory, combining the supplier price with freight, insurance, customs duty, tariffs, brokerage, and handling, so inventory is valued at what the material truly cost to acquire.
Perpetual Inventory System
A perpetual inventory system updates on-hand quantity and inventory value in real time with every receipt, issue, transfer and adjustment, so book balances are always current. A periodic system updates only after a physical count.
Go Deeper
Inventory Carrying Cost Calculator
Build your true annual carrying cost from capital, storage, insurance, and obsolescence components - and see what an inventory reduction target is worth.
How to Set Up Actual Costing in SyteLine
Learn how to configure actual costing in Infor SyteLine CloudSuite Industrial. Set up weighted average costs, FIFO layers, and real-time cost tracking for inventory.
How to Configure Standard Costing in SyteLine
Step-by-step guide to configuring standard costing in Infor SyteLine CloudSuite Industrial. Set up cost types, material costs, overhead rates, and cost rollup parameters.
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