A guide to just how the weighted median cost method works and why it might or may not job-related for her business.


The resulting COGS native each method are roughly the same level.

You are watching: Weighted average method advantages and disadvantages

In this example, there"s a start inventory balance, three purchases of different unit amounts, and also then a revenue of 250 units. Come calculate price of goods sold, we have to either pick which 250 devices were sold, or come up through an average price to use to the offered units.

Using FIFO, the 120 systems in beginning inventory, 80 to buy on June 1, and also 50 of the systems purchased on June 5 were consisted of in the COGS calculation.

LIFO uses all of the systems purchased in June and 30 that the units in start inventory.

The weighted average expense takes the typical of each purchase, load by the variety of units purchased, and also applies that to the variety of units sold. We will certainly go over how to calculate the weighted average for this instance in the next section.

There no much distinction in COGS in between the three methods because of the tiny numbers used in the example. However, businesses that easily turn inventory or have bigger price jumps than in this instance can check out that distinction quickly include up to a much more impactful adjust to the income statement.

The difference between LIFO and FIFO is which units are provided to calculate price of items sold. Weighted mean uses an typical of all systems in inventory.

How to calculation weighted typical cost

Here’s just how we calculated the load average cost in the instance above:


The average expense is calculated by weighting every transaction by the variety of units purchased.

When the sale is do on June 10, there room 340 devices of inventory. We begin by finding what percent of total inventory each transaction accounts because that by splitting the variety of units in it by the total of 340.

Then, main point that portion by the price for each transaction to discover the readjusted price. Finally, sum the adjusted prices to get the weighted average cost of $12.08, and multiply the by the number of units marketed to find the cost of products sold that $3,019.85.

The new beginning list is 90 systems (340 total units - 250 units sold) through an median price of $12.08, totaling $1,087.15. You can likewise calculate this by subtracting the price of items sold native the complete cost of inventory prior to the revenue (340 devices x $12.08 average price).

It"s a an excellent practice to counting inventory at the end of each duration and compare it through the calculated finishing inventory in order come find any type of shrinkage. Shrinkage is the ns of inventory as result of damage, loss, or theft.

Benefits and also disadvantages of utilizing the weighted mean cost method within your little business

Is load average cost right for her business? below are a couple of advantages and disadvantages the the system.

Advantages the the weighted average expense method

Here room a few advantages to making use of weighted cost:

You don’t need to tie price to units: The most time-consuming part of the LIFO and also FIFO approaches is tracking every batch that comes in together with its price come ensure items are sold in the correct order. V the load average cost method, as soon as inventory come in, you just record the purchase and also update the present weighted typical cost.You have a constant price: through FIFO and also LIFO, earnings are based on either the earliest or most recent purchases. If there"s to be a far-ranging price change, the calculation COGS and also gross margin won"t it is in accurate and also could command to bad decisions. If you have actually a running weighted average expense in mental when setting prices and making purchases, it will certainly lead to far better decisions.

Disadvantages that the weighted average expense method

Here room a few disadvantages:

Your inventory might be too heterogeneous: end time, products change. Castle evolve through included features and also deleted bugs. Through that advancement comes reasonable price changes. If her inventory turns gradually enough, you could have three or 4 iterations of the very same product in one amorphous blob the "product x" in the perform account. It’s fine come sell different versions that products, but be mindful of material transforms to products, and if they occur, parcel out the new inventory once it"s recorded.You might be including poor prices: While regular pricing is an benefit of this method, if your service has a concentration in inventory at an enlarge date, once prices were much lower, this will throw off your inventory cost. Report profit will be correct, yet the margin can lead to negative decisions if you assume it will continue to be that high forever. Unfortunately, this problem can’t be addressed by making use of a various method, such together FIFO, due to the fact that the exact same inventory cost would it is in used. It"s simply another situation come be responsibility of — you have to report cost of products sold using outdated inventory, yet that doesn’t typical you have to make decisions based upon that profit number.You might naturally use FIFO to sell inventory: If your assets are perishable or otherwise degrade over time, that is likely you follow a first-in, first-out policy as soon as selling the items. The more quickly you sell old items, the less likely they room to go to waste. If you in this situation, go ahead and use FIFO therefore you can keep her accounts together close to actual service practice as possible.

Should you move to weighted median cost?

Although it"s smart to carry out thorough research before making important company decisions, it most likely won"t take it 55 hours of analysis to identify the ideal inventory accounting an approach for her company. It need to be intuitive.

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If you offer perishable item or a lot of of different things, use FIFO. If you market a the majority of the same product over and also over, usage weighted typical cost. If girlfriend enjoy having a migraine, use LIFO.