Here is the sales ledger during their first quarter accounting period.ĭuring this accounting period, the electronics company purchased 80 items for a total cost of $47,000.īy dividing the total cost ($47,000) by the total number of items purchased (80), you arrive at the weighted-average cost per item of $587.50. Imagine a company that sells electronics items.

The average-cost method is one of the most straightforward ways to determine COGS over a specific period. This figure is essential for the business itself, as well as any investors or financial analysts, so it must be recorded accurately. The COGS figure is then subtracted from sales revenue to determine the company’s gross margin.

To keep accurate financial records, businesses are required to include the cost of goods sold (COGS) on an income statement. In addition to assigning value to the cost of goods sold, it also assigns value to the cost of goods that are still available as inventory. The period could be a month, quarter, or annual period, so long as it remains consistent. It assigns value to the cost of goods sold (COGS) by using the weighted average of all the inventory that the company purchased during a period of time. The average-cost method is useful to businesses for several reasons. How does the weighted average cost method work? These include:Īll three are equally valid, but one thing to keep in mind is that once a business chooses the method, it will need to remain consistent across all financial reports. To calculate the cost of inventory items, there are three valuation methods available to businesses. The average-cost method is simple to use, whether the goods are produced or purchased by the business. This figure is reached by dividing the total cost of goods by the total number of goods over a specific accounting cycle. Average cost method definitionĪlso referred to as the weighted average cost method, the average-cost method is an accounting formula used when calculating inventory value. Learn more about the potential benefits of the average-cost method. Inventory includes any goods to be sold, whether purchased from a manufacturer or produced by the business. Any business that sells products must find an efficient way to deal with inventory.

Weighted average inventory formula