What is Weighted Average Cost?
The weighted average cost method values inventory and cost of goods sold by computing a single average cost per unit across all units available for sale during the period. It smooths out price fluctuations and simplifies record keeping.
How It Works
- Add the cost of beginning inventory and all purchases for the period.
- Add the number of units in beginning inventory and units purchased.
- Divide total cost by total units to get the weighted average cost per unit.
- Multiply average cost by units sold to get cost of goods sold.
- Multiply average cost by units remaining to value ending inventory.
Saudi Context
IAS 2 as adopted by SOCPA permits the weighted average and FIFO methods only; LIFO is not allowed. Saudi businesses must apply the chosen method consistently and disclose it in the notes to the financial statements filed with ZATCA.
Example
Beginning inventory: 100 units at SAR 50. Purchases: 200 units at SAR 60. Total cost SAR 17,000 ÷ 300 units = SAR 56.67 per unit. If 180 units are sold, COGS = SAR 10,200 and ending inventory = SAR 6,800.