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:

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

Required:

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

Purchase Schedule

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

Cost of material closing inventory

Weighted Average Method

Periodic System

Cost of Goods Sold

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:

Required

Prepare inventory card using Moving Average method.

Solution

Tel Company

Inventory Card

Moving Average Method