Weighted Average Method – AVCO

This is another method of inventory valuation like FIFO and LIFO. It is also called AVCO method. In order to apply this method, a moving rate is calculated at the end of the reporting period.

Weighted average method of inventory valuation formula

In order to calculate the moving rate, you can use this formula:

Average rate = Total cost / Total Units

The application of AVCO is also found in periodic and perpetual systems. In periodic system, we sum up opening inventory with all the purchases during the period in order to find out the total units available for sale and the total cost of goods sold. On the other hand, in perpetual system, you need to calculate the average rate just before every sale. So, it is assumed to be the hardest one.

The weighted average method of inventory valuation is the allowed procedure under US GAAP and IFRS.

Example Question Weighted Average Inventory System

Tata manufacturing uses periodic inventory system. The opening inventory of one item on 1 January and purchases during the month of January are as follows:

Jan 1Inventory10,000 units@$12
Jan 8Purchases15,000 units@$16 
Jan 14Purchases18,000 units@$18 
Jan 22Purchases12,000 units@$19 
Jan 27Purchases5,000 units@$21 

During the month of Jan,35,000 units were sold.

Required:

Determine the cost of ending inventory and cost of goods sold.

Answer

Purchase Schedule

DateDescriptionUnitsRate ($)Total
Jan 01 Opening 10,000 12  120,000
Jan 08 Purchases 15,000 16  240,000
Jan 14 Purchases 18,000 18  324,000
Jan 22 Purchases 12,000 19  228,000
Jan 27 Purchases 5,000 21  105,000
 Available for sale 60,000   1,017,000

 Average unit cost = Total cost / Total units = 1,017,000 / 60,000 = 16,95 per unit

Cost of closing/ ending inventory = Units at end x Average Unit cost = 25,000 x 16,95 = 423,000
Units available for sale(10,000+15,000+18,000+12,000+5000)60,000
Units sold 35,000
Units at end(60,000-35,000)25,000

Cost of material closing inventory

Weighted Average Method

Periodic System

Date Description Units Rate ($) Total  
Jan 14 Purchases 8,000 18 144,000 
Jan 22 Purchases  12,00019 228,000 
Jan 27 Purchases 5,000 21 105,000 
 Closing inventory 25,000  477,000 

Cost of Goods Sold

DescriptionFIF0
Opening inventoryAdd: PurchasesInventory available for saleLess: Closing InventoryCost of goods sold120,000897,0001,017,000(423,750)593,250

Example Question Weighted Average Perpetual Inventory System 

Inventory Card Perpetual Inventory System – Moving Average Method Example Question & Answer

Tel is a towel manufacturing company operating in Ukraine. It has two warehouses in Kyjev where it stocks all its raw material goods. TEL uses perpetual inventory system for better stock control and management. Following are the transactions related to its raw material goods in its Eastern warehouse:

Sep 01Opening stock 14,000 units of $ 49,000.
Sep 05TEL purchased 7,200 units for cash $ 18,000.
Sep 09TEL purchased 8,000 units on credit term for $ 32,000.
Sep 13Raw material units 10,000 sold to other entity for cash 50,000.
Sep 17TEL purchased 7,000 units for $ 28,000.
Sep 21TEL sold 6,000 units for cash $ 30,000
Sep 25TEL sold 7,800 units for cash $ 39,000.
Sep 29Purchased 8,800 units on cash for $ 22,000.
Sep 30TEL sold on credit for 30 days 10,000 units for $ 50,000.

Required

Prepare inventory card using Moving Average method.

Solution

Tel Company

Inventory Card

Moving Average Method

DatePurchasesSalesBalance
SepUnitsPUCostUnitsPUCostUnitsPUCost
01      140003.549,000
0572002.518,000   212003.1667,000
       
098000432,000   292003.3999,000
          
          
13   100003.3933,900192003.3965,088
          
177000428,000   262003.5593,088
          
          
21   60003.5521,300202003.5571,788
          
          
25   78003.5527,720124003.5544,068
          
          
2988002.522,000   212003.1266,068
          
          
30   100003.1231,200112003.1234,944
          
 31000 100,00033800 114,12011200 34,944