Weighted average method

Written by Fmi.Online Thursday November 10, 2022
The weighted average method is an inventory costing method that assigns average costs to each piece of inventory when it is sold during the year.

Explanation :

  Retailers and other businesses that keep and sell inventory must keep track of the cost of inventory on hand as well as the cost of inventory that was sold. In theory this sounds simple, but it can be a lot more complex when large companies deal with thousands or even tens of thousands of inventory sku numbers. There are three different types of inventory costing methods: FIFO (First-in, First-out), LIFO (Last-in, Last-out), and Weighted Average.

In a nutshell :

 
  • The weighted average takes into account the relative importance or frequency of some factors in a data set.
  • A weighted average is sometimes more accurate than a simple average.
  • Stock investors use a weighted average to track the cost basis of shares bought at varying times.
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