The weighted-average method, a core inventory valuation technique, involves determining the cost of goods available for sale and dividing that figure by the total units available for sale during a specific period. This calculation yields a weighted-average cost per unit. This cost is then applied to both the cost of goods sold and ending inventory. As an example, consider a company that has 100 units in beginning inventory at a cost of $10 per unit, and then purchases an additional 200 units at $12 per unit. The total cost of goods available for sale would be (100 x $10) + (200 x $12) = $3,400. If 250 units are sold, the cost per unit is $3,400 / 300 = $11.33. Therefore, the cost of goods sold is 250 x $11.33 = $2,832.50, and the value of ending inventory (50 units) is 50 x $11.33 = $566.50.
Utilizing this technique simplifies inventory management and offers a smoothing effect on profits, particularly beneficial when material costs fluctuate significantly. It minimizes the impact of price volatility on financial statements by averaging costs over a period. This methodology has been employed for decades as a practical approach to valuing inventory and providing a stable reflection of business performance.
