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How can you use the Weighted Average method for stock management?

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If you manage inventory, you need to know how to value your stock and account for the cost of goods sold (COGS). One of the methods you can use is the Weighted Average method, which calculates the average cost of each unit of inventory based on the purchase prices and quantities. In this article, you will learn how to use the Weighted Average method for stock management, and what are its advantages and disadvantages.

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1 What is the Weighted Average method?

The Weighted Average method is an inventory accounting principle that assigns the same cost to each unit of inventory, regardless of when or at what price they were purchased. The cost is calculated by dividing the total cost of goods available for sale by the total number of units available for sale. The Weighted Average method can be applied to both periodic and perpetual inventory systems, which differ in how often the inventory records are updated.

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Prateek Kumar

ZF Global Ambassador | Deputy Manager @ ZF Group Procurement Leader, Supply Chain Expert | ??Subscribe to my newsletters "ProcDoc By Prateek Kumar" & "#PKTalksLeadership" for insights on procurement and leadership.
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The Weighted Average (WA) method isn't directly used for stock management in the traditional sense of tracking individual items. However, it's a valuable tool for inventory valuation in several contexts, which indirectly impacts stock management decisions

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2 How to calculate the Weighted Average cost per unit?

To calculate the Weighted Average cost per unit, you need to know the total cost of goods available for sale and the total number of units available for sale. The total cost of goods available for sale is the sum of the beginning inventory cost and the purchases cost during the period. The total number of units available for sale is the sum of the beginning inventory quantity and the purchases quantity during the period. The formula for the Weighted Average cost per unit is: Weighted Average cost per unit = Total cost of goods available for sale / Total number of units available for sale

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Prateek Kumar

ZF Global Ambassador | Deputy Manager @ ZF Group Procurement Leader, Supply Chain Expert | ??Subscribe to my newsletters "ProcDoc By Prateek Kumar" & "#PKTalksLeadership" for insights on procurement and leadership.
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Cost of Goods Sold (COGS) calculation: In periodic inventory systems, the WA method is used to determine the average cost per unit of inventory sold during a specific period. This helps calculate the COGS, which is vital for financial reporting and understanding profitability. By multiplying the WA cost per unit by the number of units sold, you get the total COGS for the period. This helps assess the cost of production and its impact on the company's bottom line.

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3 How to calculate the COGS and the ending inventory value?

To calculate the COGS and the ending inventory value, you need to know the Weighted Average cost per unit and the number of units sold and left in inventory. The COGS is the product of the Weighted Average cost per unit and the number of units sold. The ending inventory value is the product of the Weighted Average cost per unit and the number of units left in inventory. The formulas for the COGS and the ending inventory value are: COGS = Weighted Average cost per unit * Number of units sold Ending inventory value = Weighted Average cost per unit * Number of units left in inventory

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Prateek Kumar

ZF Global Ambassador | Deputy Manager @ ZF Group Procurement Leader, Supply Chain Expert | ??Subscribe to my newsletters "ProcDoc By Prateek Kumar" & "#PKTalksLeadership" for insights on procurement and leadership.
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COGS = Weighted Average cost per unit * Number of units sold Ending inventory value = Weighted Average cost per unit * Number of units left in inventory

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4 What are the advantages of the Weighted Average method?

The Weighted Average method of inventory accounting offers several advantages compared to other methods, such as FIFO and LIFO. This method is simple and easy to apply, as it does not require tracking the purchase dates or prices of individual units of inventory. Additionally, it smoothes out the fluctuations in purchase prices, which can reduce the impact of inflation or deflation on the inventory value and the COGS. Moreover, it matches the physical flow of goods in some industries, such as agriculture, mining, or oil, where the units of inventory are indistinguishable and mixed together.

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5 What are the disadvantages of the Weighted Average method?

The Weighted Average method of inventory accounting has some drawbacks compared to other methods, such as FIFO and LIFO. This method does not reflect the actual cost of the units sold or left in inventory, since it assumes that all units have the same cost. It also does not show the effect of price changes on the inventory value and the COGS, which can lead to inaccurate profitability and financial ratios. Additionally, it may not comply with tax laws or accounting standards in certain countries that prefer FIFO or LIFO methods.

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Kiran Shrestha

Automotive Spare Parts Professional
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The weighted average method has a limited scope of application as it uses assumptions of cost which may cause problems. Profitabilty in a market is totally uncertain with changing demands, needs, competition, and prices. It is required to consider the fact of understanding the return on that capital when determining the cost.

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6 How to use the Weighted Average method for stock management?

To use the Weighted Average method for stock management, you must first record the purchase price and quantity of each batch of inventory you buy during the period. Then, calculate the total cost of goods available for sale and the total number of units available for sale by adding the beginning inventory and the purchases. The Weighted Average cost per unit is determined by dividing the total cost of goods available for sale by the total number of units available for sale. Next, record the number of units sold and left in inventory at the end of the period. The COGS and ending inventory value can be calculated by multiplying the Weighted Average cost per unit by the number of units sold and left in inventory, respectively. Finally, update your inventory records and your income statement with the COGS and ending inventory value.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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KUNAL BHAT , PMP

SAP S4/HANA Solution Architect | IT Business Analyst | Supply Chain Expert | Drove 40% Process Efficiency with SAP IBP and APO | Process Re-engineering & SAP Integration | Process Optimization & System Integration
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The Weighted Average method for stock management calculates the average cost of inventory by considering both the quantity and cost of goods. To implement it, sum the total cost of all units in stock and divide by the total quantity. This provides a weighted cost per unit. When new stock is acquired, its cost is multiplied by the quantity and added to the existing total. The total cost is then divided by the updated total quantity. This method smoothens fluctuations in unit costs, aiding in more accurate financial reporting and cost control, especially in industries with volatile material costs.

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How can you use the Weighted Average method for stock management?

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1 What is the Weighted Average method?

2 How to calculate the Weighted Average cost per unit?

3 How to calculate the COGS and the ending inventory value?

4 What are the advantages of the Weighted Average method?

5 What are the disadvantages of the Weighted Average method?

6 How to use the Weighted Average method for stock management?

7 Here’s what else to consider

Inventory Management

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How can you use the Weighted Average method for stock management?

1

2

3

4

5

6

7

1 What is the Weighted Average method?

2 How to calculate the Weighted Average cost per unit?

3 How to calculate the COGS and the ending inventory value?

4 What are the advantages of the Weighted Average method?

5 What are the disadvantages of the Weighted Average method?

6 How to use the Weighted Average method for stock management?

7 Here’s what else to consider

Inventory Management

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