Weighted Average Formula – Definition
The inventory weighted average determines the amount of money spent on cost of goods sold (COGS) and inventory. Also referred to as ‘weighted average cost’, the weight formula is one of the four most popular inventory valuation techniques in e-commerce accounting.
Significance of Weighted Average Formula in an E-commerce Business
With a weighted average cost formula, companies can determine the value of their current inventory. Some benefits of weighted average formula accounting in e-commerce include:
- Less paperwork – The WAC technique necessitates a weighted mean formula to calculate the average value of all items in stock. There is less paperwork because there is no need to keep thorough inventory purchasing records as each item is priced at the same amount.
- Lowers extra costs – Using the weighted average formula saves time and money when calculating current inventory value.
Applications of the Weighted Average Formula
WAC module is best suited for direct-to-consumer brands with high inventory value wherein each item has the same price. Some simple applications of the weighted average unit cost formula include-
- Efficient inventory calculation for steady profits. Companies can rule out any extra costs in the inventory management.
- Applying the formula when it’s too complicated to determine individual unit and the cost associated with it
- With a weighted average cost formula, companies can practice optimized inventory replenishment
Weighted Average Formula
Weighted Average Cost =
Cost of Goods available for Sale
Total Number of Units in inventory
Definition of Each Element Used in the Weighted Average Formula
- Cost of Goods available for Sale – Total amount of recent purchases and beginning inventory.
- Total number of units in inventory – Total units present in the inventory for the time period.
How To Use the Weighted Average Formula To Calculate a Business’ Turnover Ratio?
Assume a company XYZ purchases 10,000 units of a product at AUD1 each, 5,000 at AUD1.50 each, and 5,000 at AUD1.75 each.
Therefore, using the weighted average unit cost formula,
Weighted Average Cost = Cost of Goods available for Sale ÷ Total number of units in inventory
WAC =
[( AUD1 X 10,000) +(AUD1.50 X 5,000) + (AUD1.75 X 5,000)]
[10,000 +5,000 +5,000]
WAC =
( AUD10,000 + AUD7,500 + AUD8,750 )
20,000
= AUD26,250 / 20,000
= AUD1.31
Thus from the weighted average method formula, the weighted average cost is AUD1.31 per unit.
Inference
By using the weighted average formula, a business can successfully determine and maintain its inventory without unnecessary costs piling upon it.