Weighted Average Inventory Method | Free Cost Accounting Articles
Weighted Average Inventory Method
Weighted Average Inventory Method
This method gives due importance to the quantity of material in stock. Under this method issue price of the material is calculated by dividing the value of materials in stock by the quantities of material in stock
Rate of Issue = Value of material in stock / quantities of material in stock
Weighted average rate is calculated each time when a fresh lot is received. It remains the same till the next lot is received. Thus issue prices are calculated at the time of receipt of material and not all the times of issue of material.
This method is useful, where the purchase price and quantities of material are widely different.
The weighted average method is quite superior to other methods and it is better to follow this method. This method can be used with advantage in those cases where price and quantity vary widely. The average rate does not change with the issue but would vary with a fresh supply of materials received when a new average will have to be calculated, in a period of fluctuating price this method will even out the fluctuations. This method is also goods as the weighted average rate lies in between the extreme rates as shown by FIFO and LIFO methods. However, the difficulty is that fresh calculations are needed at every purchase of materials or goods.
- First in First out Method (FIFO)
- Last in First out Method (LIFO)
- Simple Average Method
- Weighted Average Method
Advantages
The following are the advantages of the Weighted Average Inventory Method.
i) Easy to calculate and operate.
ii) Closing stock value is acceptable.
iii) When prices fluctuate considerably, it smooths out the fluctuations.
iv) This method is more logical than the simple average method.
Disadvantages
The main disadvantages of the Weighted Average Inventory Method.
i) The issues are not priced at the current market price.
ii) Issue price of materials does not represent actual cost price and therefore a profit or loss may arise.
iii) It involves a considerable amount of clerical work.
