What is Weighted average cost?

Weighted average cost answers a practical question: when you have bought the same item five times this year at five different prices, what is a unit worth now? The answer is the average of everything you hold, weighted by quantity, recalculated each time new stock arrives.

Compared with first in, first out (FIFO), it smooths out price changes instead of following each one. FIFO values your remaining stock at your most recent purchase prices, so your closing figure moves with the market. Weighted average moves more slowly. Many businesses prefer that, because it keeps gross margin steadier from month to month.

Neither method is more correct. Use one method consistently, and make sure the system can produce the closing figure again, without a spreadsheet. The valuation feeds your closing stock figure, and so your reported profit.

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