What is Weighted Average Cost Method?
The weighted average cost method is an inventory valuation technique that calculates the cost of each unit by dividing the total cost of goods available for sale by the total units available, producing a single average cost used for both COGS and ending inventory.
How It Works
- Formula: weighted average cost = total cost of inventory available / total units available.
- Recalculated after every purchase under the perpetual system (moving average).
- Calculated once at period end under the periodic system.
- Smooths price fluctuations and is simpler than FIFO during inflation.
Saudi Context
The weighted average cost method is accepted under IFRS, IAS 2, and ZATCA’s VAT regulations. It is particularly common with Saudi commodity distributors, fuel retailers, and petrochemical wholesalers where unit prices fluctuate frequently and FIFO tracking would be administratively heavy.
Example
A Saudi importer holds 100 units at SAR 50 each and buys 200 more at SAR 65 each. Weighted average cost = (100 × 50 + 200 × 65) / 300 = SAR 60 per unit.