What is the weighted average cost method?
Instead of tracking which specific batch was sold, the weighted average cost (WAC) method uses an average cost for all identical units. It is allowed under both IFRS (IAS 2) and US GAAP.
Formula
Average cost per unit = Total cost of goods available ÷ Total units available
Example (periodic)
- Opening stock: 100 units at $10 = $1,000
- Purchase 1: 200 units at $12 = $2,400
- Purchase 2: 100 units at $14 = $1,400
- Total: 400 units costing $4,800 → average $12 per unit
If 300 units are sold, [cost of goods sold](/glossary/cost-of-goods-sold) is $3,600 and closing inventory is 100 × $12 = $1,200.
Periodic vs perpetual (moving average)
- Periodic: average calculated once at period end.
- Perpetual / moving average: average recalculated after each purchase, which most inventory software does automatically.
WAC vs FIFO
- FIFO: assumes oldest stock is sold first; in rising prices, COGS is lower and profit higher.
- WAC: sits between FIFO and LIFO, smoothing out price swings.
When to use it
WAC suits businesses with large volumes of identical, interchangeable items, such as fuel, grain, chemicals or bulk goods.