Weighted average method

The weighted average method consolidates starting stock expenses and works finished with current-period expenses and work to compute this present period's unit cost. The expenses and work continued from the earlier period are considered if they have a place with the present time frame. Along these lines, starting stock work and expenses are pooled with current work and costs, and a normal unit cost is registered and applied to the two units moved out and units staying in completion stock.

Accounting methods

Citizens utilizing the FIFO strategy for bookkeeping or the particular products. LIFO technique for representing inventories may utilize the weighted normal technique - the number of extra costs that must be apportioned to inventories for earlier years. The weighted average strategy under passage is just accessible to citizens who need adequate information to revalue their stock expenses under the realities and conditions revaluation technique accommodated in the passage of this segment. Detailed description of accounting methods :

• The weighted average method - citizens who fit the bill for the utilization of weighted average method technique will use such a strategy just regarding things or costs which they need adequate data to revalue under the capitalization rules of this area. Specific things or costs must be revalued under the realities and conditions revaluation technique if adequate data exists to make such a revaluation. On the off chance that a citizen needs adequate data to generally apply the weighted normal strategy under this passage (e.g., the citizen can't revalue the expenses of any of its things in stock because of an absence of data), at that point the citizen will utilize sensible assessments and techniques, as depicted in the realities and conditions revaluation of this segment, to anything that degree is important to permit the duty strategy to anything that degree is important to enable the citizen to apply the weighted average method.
• LIFO - citizens utilizing the particular merchandise technique for esteeming inventories. Under the weighted normal technique, the stock layers regarding a thing for which information is accessible are revalued under this area and the expansion in sum for each layer is communicated as a level of progress from the expense as initially esteemed. A weighted normal of the level of progress for all layers for each kind of good is processed and applied to every prior layer for each sort of good which needs adequate information to take into account revaluation. On account of prior layers for which adequate information exists, such layers are to be revalued utilizing real information. In situations where adequate information isn't accessible to make a weighted normal gauge concerning a specific thing of stock, a weighted normal increment is to decide to utilize all other stock things revalued by the citizen in a similar pool; this rate increment is then used to revalue the expense of the thing for which information is deficient.
• FIFO - under the presents the specialists weighted normal technique, a thing in completion stock for which adequate information isn't accessible for revaluation under this area will be revalued by utilizing the weighted normal rate increment as for such thing for the main resulting year for which adequate information is accessible. As for a thing for which no consequent information exists revalued by utilizing the weighted normal rate increment with deference, the thing will be to all sensibly similar things in the citizen's stock for that year or the main resulting year for which adequate information is accessible.

Examples of Weighted average method

• In a manufacturing setting, the weighted average method may be used to calculate the cost of goods sold. This method takes into account the cost of materials, labor, and overhead associated with the production of goods. For example, if a company produces 1,000 widgets in a month, the weighted average method would consider the cost of materials, labor, and overhead associated with each widget in order to determine the total cost of goods sold.
• In a retail setting, the weighted average method can be used to calculate the price of items in inventory. For example, a store may use the weighted average method to calculate the cost of items in inventory at the end of a given month. The store would take into account the original cost of the items, as well as any discounts or markups that have been applied over the course of the month, in order to determine the weighted average price.

Advantages of Weighted average method

The weighted average method is a useful inventory costing system used in many businesses to accurately assess the value of their inventory. The following are some of the advantages of this method:

• It is simple to understand and easy to implement, making it an economical and time-saving way of calculating inventory costs.
• It is a more accurate way of calculating unit costs than the other methods, as it takes into account both current and past costs.
• It does not require the recording of each individual item cost, which is time-consuming and can be expensive.
• It is less volatile than other methods, which helps to ensure that the inventory costs remain stable.
• It encourages a company to keep accurate records of its inventory, as it is necessary for calculating the unit cost.

Limitations of Weighted average method

The Weighted Average Method has several limitations that may limit its usefulness in certain situations. These include:

• The method does not take into account the varying costs of production from one period to the next. This can lead to inaccurate results if the cost of production changes significantly between periods.
• The method can also be affected by pricing changes, as the average cost of production is calculated by taking into account the prices of all the units produced in the current period, regardless of how much the price has changed since the last period.
• The method does not take into account any potential scrap or waste that may occur during production. This could lead to an artificially low cost of production if the scrap rate is not taken into account.
• The method does not take into account any changes in the quality of the product from one period to the next. This can lead to inaccurate results if the quality of the product has changed significantly since the last period.
• Finally, the method does not take into account any changes in demand for the product from one period to the next. This could lead to an artificially low cost of production if the demand has decreased significantly since the last period.

Other approaches related to Weighted average method

The Weighted Average Method can be supplemented with other approaches in order to gain a more accurate understanding of inventory costs. Some of these approaches include:

• FIFO (First-In, First-Out): This approach assumes that the first units acquired are the first units sold, so that the cost of the beginning inventory is attributed to the first units sold.
• LIFO (Last-In, First-Out): This approach assumes that the last units acquired are the first units sold, so that the cost of the current inventory is attributed to the first units sold.
• Specific Identification Method: This approach assigns specific costs to specific items.
• Average Cost Method: This approach assigns a weighted average cost to each item based on the average cost of all items in the inventory.

In summary, the Weighted Average Method can be supplemented by other approaches such as FIFO, LIFO, Specific Identification Method and Average Cost Method to gain a more accurate understanding of inventory costs.

Footnotes

Weighted average method — recommended articles

Inventory value — Opening stock — Cost per unit — Closing stock — Applied overhead — Double counting — Retail inventory method — Cost oriented pricing — Absorbed costs

References

• Flood J. M., (2014), Wiley Gaap 2015: Interpretation and Application of Generally Accepted Accounting Principles Wiley Regulatory Reporting, John Wiley & Sons
• Internal Revenue Service Staff, (1975), The Code of Federal Regulations of the United States of America, Government Printing Office
• Mowen M., Hansen D., Heitger D., (2008), Cornerstones of Managerial Accounting, Cengage Learning
• Stevenson R. J., (2010), Organizational Reaction to Social Deviance: The Military Case, Algora Publishing

Author: Magdalena Łach