How to Calculate Weighted Average Cost (WAC)

The Weighted Average Cost (WAC) method helps businesses value their inventory. This accounting technique determines the average cost of all available units, which is then used to assign costs to goods sold and to the remaining inventory. WAC provides a consistent valuation, particularly when identical inventory items are acquired at varying prices over time.

Understanding Key Calculation Components

Calculating the Weighted Average Cost relies on two primary components: the “Cost of Goods Available for Sale” and the “Total Units Available for Sale.” The Cost of Goods Available for Sale represents the total monetary value of all inventory a business could have sold during an accounting period. This figure combines the cost of beginning inventory with the total cost of all new purchases made during that period.

Similarly, the Total Units Available for Sale refers to the total quantity of inventory units that were on hand and could have been sold. This is determined by adding the number of units in beginning inventory to the number of units acquired through purchases during the period. Both of these components are essential inputs for the WAC formula.

Calculating Weighted Average Cost Step-by-Step

The Weighted Average Cost method calculates a single average cost for all inventory units. This average is determined by dividing the total cost of goods available for sale by the total number of units available for sale. The resulting per-unit cost is then applied to both the cost of goods sold and the value of ending inventory. This approach smooths out price fluctuations, offering a consistent valuation.

For example:
Beginning Inventory: 100 units at $10 each (Total Cost: $1,000)
Purchase 1: 200 units at $12 each (Total Cost: $2,400)
Purchase 2: 150 units at $14 each (Total Cost: $2,100)

First, calculate the Total Cost of Goods Available for Sale by summing the beginning inventory cost and all purchase costs ($1,000 + $2,400 + $2,100 = $5,500). Next, determine the Total Units Available for Sale by adding the beginning inventory units and all purchased units (100 + 200 + 150 = 450 units). Finally, divide the Total Cost of Goods Available for Sale by the Total Units Available for Sale to find the Weighted Average Cost per unit ($5,500 / 450 units = $12.22 per unit, rounded).

Applying Weighted Average Cost in Inventory Systems

The application of the Weighted Average Cost method differs depending on the inventory system a business employs: periodic or perpetual. Under a periodic inventory system, the Weighted Average Cost is calculated only at the end of an accounting period. This means that all purchases and beginning inventory for the entire period are aggregated to determine a single average cost, which is then applied to all goods sold and remaining inventory.

In contrast, a perpetual inventory system requires the Weighted Average Cost to be recalculated after each new purchase. This continuous recalculation is sometimes referred to as the “moving average cost method.” Each time new inventory is acquired, the average cost per unit is updated to reflect the new total cost and total units available. This adjustment provides a more current average cost, influencing the cost of goods sold and inventory valuation.