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 1 | Inventory | 10,000 units | @$12 |
| Jan 8 | Purchases | 15,000 units | @$16 |
| Jan 14 | Purchases | 18,000 units | @$18 |
| Jan 22 | Purchases | 12,000 units | @$19 |
| Jan 27 | Purchases | 5,000 units | @$21 |
During the month of Jan,35,000 units were sold.
Required:
Determine the cost of ending inventory and cost of goods sold.
Answer
Purchase Schedule
| Date | Description | Units | Rate ($) | 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 | 12,000 | 19 | 228,000 |
| Jan 27 | Purchases | 5,000 | 21 | 105,000 |
| Closing inventory | 25,000 | 477,000 |
Cost of Goods Sold
| Description | FIF0 |
| Opening inventoryAdd: PurchasesInventory available for saleLess: Closing InventoryCost of goods sold | 120,000897,0001,017,000(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 01 | Opening stock 14,000 units of $ 49,000. |
| Sep 05 | TEL purchased 7,200 units for cash $ 18,000. |
| Sep 09 | TEL purchased 8,000 units on credit term for $ 32,000. |
| Sep 13 | Raw material units 10,000 sold to other entity for cash 50,000. |
| Sep 17 | TEL purchased 7,000 units for $ 28,000. |
| Sep 21 | TEL sold 6,000 units for cash $ 30,000 |
| Sep 25 | TEL sold 7,800 units for cash $ 39,000. |
| Sep 29 | Purchased 8,800 units on cash for $ 22,000. |
| Sep 30 | TEL 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
| Date | Purchases | Sales | Balance | ||||||
| Sep | Units | PU | Cost | Units | PU | Cost | Units | PU | Cost |
| 01 | 14000 | 3.5 | 49,000 | ||||||
| 05 | 7200 | 2.5 | 18,000 | 21200 | 3.16 | 67,000 | |||
| 09 | 8000 | 4 | 32,000 | 29200 | 3.39 | 99,000 | |||
| 13 | 10000 | 3.39 | 33,900 | 19200 | 3.39 | 65,088 | |||
| 17 | 7000 | 4 | 28,000 | 26200 | 3.55 | 93,088 | |||
| 21 | 6000 | 3.55 | 21,300 | 20200 | 3.55 | 71,788 | |||
| 25 | 7800 | 3.55 | 27,720 | 12400 | 3.55 | 44,068 | |||
| 29 | 8800 | 2.5 | 22,000 | 21200 | 3.12 | 66,068 | |||
| 30 | 10000 | 3.12 | 31,200 | 11200 | 3.12 | 34,944 | |||
| 31000 | 100,000 | 33800 | 114,120 | 11200 | 34,944 |