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Frequently Asked Questions
What is a weighted average cost?
The weighted average cost is the average cost of all units purchased over a particular period.
How does a weighted average cost work?
The weighted average cost method follows the concept of total stock and total valuation. This method of Material Costing is used for costing materials requisition and charging the cost of materials to production. The balance on hand is also composed of units valued at the weighted average cost.
How do you calculate the average price?
To find the average price, the total cost of all materials of a particular class is divided by the number of units in hand. When new materials are purchased, the average price is calculated as follows: 1. Add the quantity of units purchased to the quantity of units on hand 2. Add the cost of newly purchased materials to the cost of materials on hand 3. Divide the total cost (step 2) by the total quantity (step 1)
What are the formulas for weighted average cost?
One formula for weighted average cost is: cost of units already in hand + cost of newly purchased units / units already in hand + newly purchased units another version of this formula is: weighted average unit cost = total cost item / total units of item
What are the advantages of weighted average cost method?
The main advantages of the weighted average costing method include: - minimizes the effect of unusually high and low material prices - practical and suitable for charging the cost of materials used to production - enables management to analyze operating results - simple to apply when receipts for materials are not numerous
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.