Introduction

Weighted Average Cost (WAC) is a method used to find the average cost of products in stock based on the weight of each product’s cost. This method is commonly used in businesses and helps in determining the value of remaining inventory and calculating the cost of goods sold. In this article, we will explain how to calculate the weighted average cost with a step-by-step guide.

Step 1: Identify Relevant Data

To calculate the weighted average cost, you need to gather relevant data related to your inventory. You will need:

1. The quantity of each item in stock

2. The individual cost of each item

Step 2: Calculate Extended Costs

Extended costs are calculated by multiplying the individual cost of each item by its corresponding quantity in stock. For each item, use the formula:

Extended Cost = Quantity × Individual Cost

Repeat this for all items in your inventory.

Step 3: Calculate Total Extended Cost and Total Quantity

To calculate the total extended cost, sum up all the extended costs calculated in Step 2. Also, add up all the quantities calculated earlier.

Total Extended Cost = Σ(Extended Costs)

Total Quantity = Σ(Quantities)

Step 4: Calculate Weighted Average Cost

Now that you have all the required data, you can calculate the weighted average cost using this formula:

Weighted Average Cost (WAC) = Total Extended Cost ÷ Total Quantity

This will provide you with a single weighted average cost that represents an average cost per unit in your inventory.

Example:

Suppose a company has three types of widgets in its inventory:

1. Widget A – Quantity: 10, Individual Cost: $5

2. Widget B – Quantity: 5, Individual Cost: $15

3. Widget C – Quantity: 15, Individual Cost: $10

Calculate their weighted average cost.

Step 1: Identify Relevant Data

Quantity – Widget A: 10, Widget B: 5, Widget C: 15

Cost – Widget A: $5, Widget B: $15, Widget C: $10

Step 2: Calculate Extended Costs

Extended Cost – Widget A = 10 × $5 = $50

Extended Cost – Widget B = 5 × $15 = $75

Extended Cost – Widget C = 15 × $10 = $150

Step 3: Calculate Total Extended Cost and Total Quantity

Total Extended Cost = $50 + $75 + $150 = $275

Total Quantity = 10 + 5 + 15 = 30

Step 4: Calculate Weighted Average Cost

Weighted Average Cost (WAC) = Total Extended Cost ÷ Total Quantity

WAC = $275 ÷ 30 = approximately $9.17

In this example, the weighted average cost per widget is approximately $9.17.

Conclusion

Calculating the weighted average cost is essential for businesses to understand the value of their inventory and make informed decisions. By following these steps and using the provided formulas, you can quickly and easily calculate your business’s weighted average cost.