Weighted Average Inventory Method - Accounting

All right, here we go with everyone's favorite weighted average method

This one's different because it's not making the assumption that we're going to go in a certain

order. We're going to make this a little bit different. We're going to make everything the

same price. We're going to figure out what that weighted average cost is and just assume everything

is the same. So I do want you to make notice that this is not average, this is weighted average. So

it's a little different than what you would normally think of just a basic average. But let's talk about the definition first and then we'll get into the example

So this assumes a cost flow and a weighted average of the cost available

The conceptual statement here is not going to make a whole lot of sense because it's very wordy, but you'll make a lot more sense when we actually see

that visually. So conceptually as the sales occur, weighted average computes the average cost per unit of inventory at the time of sale and charges it to

the average cost of goods sold, leaving the average cost of inventory on hand to the inventory

account. Again, a lot of words, a lot of averages, a lot of different things. But I want to show you

this visually how this works. So let's go back to our example. We're a Delta company again. We sold

29. Okay, wonderful. Let's go ahead. We don't care where they come from. Now, weighted average has

three steps. If you remember these three steps to figure out weighted average, it's going to make

your life a whole lot easier. The first step is I want to multiply everything out. I know that I

have nine units from January 1st and those nine units cost me $25 a piece. So if I multiply nine

times 25 that going to give me 225 And if I do the same thing for April 15th multiply that out multiply it by 27 that going to give me 432 Same thing for October 13th multiply that out that going to give me 660 okay that step one multiply everything out

Step two maybe even a little easier add those three together in this situation those three

but add those up okay if I add those up that's going to give me a total of 1,317 okay. Step three

is I'm going to divide that by the total quantity that I have available to sell

So we have nine in January 1st, we have 16 in April 15th, and we have 22 in October 13th

So if I add those quantities up, that's going to give me a total of 47 units. That's what I have

available to sell. Divide that out, that's going to give me a weighted average of $28.02. Now what

what does that mean? Okay. What does this $28.02 mean? Well, that's very important because now that

I have $28.02 per unit, I don't care what's $25 and what's $27 and what's $30 because all I know

now is that all of them are $28.02. It makes my life a whole lot easier because now if I have to

sell 29 of them that I did, I don't have to keep up where they came from. There's just 29 at $28.02

a piece. That's what it costs me. So again, it's a different, it's not average because if it was

average then we would have just multiplied, or we would have added up 25 plus 27 plus 30 divided by

3. This is weighted average. It's based on the quantity. So that's what makes it a little bit

trickier. But if you know those three steps, it makes your life a whole lot easier. And you'll

see this again in the example in the next video when we actually do it in practice. So appreciate it