Weighted Average Cost (WAC) Method
Weighted average cost (WAC) per unit is calculated by dividing the units available for sale from the cost of goods available for sale. Weighted average cost (WAC) method also called a weighted average or weighted average method.
According to this method, the average cost for the good available for sale is calculated at first. The same WAC is used to calculate the cost of goods sold and cost of ending inventory. This method provides the average tax between FIFO and LIFO method. This method is applicable to both the perpetual inventory system and periodic inventory system.
Weighted Average Cost (WAC) Method Formula
The formula of the weighted average cost method expressed as below:
Under this method, a company always gets income tax between Last in First Out (LIFO) and First in First Out (FIFO) either there is increasing the unit cost of inventory (goods) or decreasing unit cost of inventory.
WAC under periodic inventory system
Like FIFO and LIFO method it is also used to the valuation of inventory and cost of goods sold (COGS). The cost of goods sold is determined by multiplying the WAC per unit with units sold. Whereas, the cost of ending inventory is determined by multiplying the WAC per unit with units on hand. The formula of calculation of the cost of ending inventory and cost of goods sold also represents as:
Where the cost of goods available for sale is the cost of units that are available during the year for selling purpose. It includes the cost of beginning inventory and cost of units purchased during the year. Whereas the cost of ending inventory is the cost of the units which remain to be from selling during the year.
WAC under the perpetual inventory system
Under the perpetual inventory system, the weighted average cost is determined whenever the new purchase has occurred. The sum of the newly purchased units and beginning units are divided by the sum total cost of those inventories.
Example of Weighted average cost (WAC) method
The following information was found in the books of ABC Company for the month of January, 2019.
Purchases during the month:
|Beginning, January 1||400||4|
During the month the company sold 2,000 units. Determine the cost of ending inventory and cost of goods sold using the weighted average cost method under the periodic inventory system.
Under the Periodic Inventory System
Calculation of cost of goods available for sale
|Date of purchase||Units purchased||Unit Cost||Total Cost (Rs.)|
Here, Cost of goods available for sale = Rs. 16,200
Units available for sale = 2,600 units
Units sold = 2,000 units
Units on hand = Units available for sale – Units sold = 2,600 – 2,000 = 600 units
Using weighted average cost (WAC) method
Weighted average cost (WAC) per unit = Cost of goods available for sale / Units available for sale = 16,200 / 2,600 = Rs. 6.23
Cost of goods sold = WAC * Units sold = 6.23 * 2,000 = Rs. 12,460
Cost of ending inventory = WAC * Units on hand = 6.23 * 600 = Rs. 3,738