Weighted Average Cost
Weighted Average Cost (WAC) is an inventory valuation method that assigns a single average unit cost to all units available for sale or use by dividing total inventory cost by total inventory quantity. This blended rate is used to value production issues, backflushes, ending inventory, and COGS consistently, whether applied periodically or as a moving average in ERP systems.
In a production environment, WAC is applied when identical raw materials, components, or finished goods are pooled and lot-level cost tracking is unnecessary. On the shop floor, each issue to a production order, backflush, or inventory withdrawal is valued at the current average unit cost rather than a specific purchase order receipt. When the ERP uses moving average costing, every new receipt recalculates the average, and that updated rate drives the next consumption. This stabilizes valuation for items like resin, steel coil, fasteners, chemicals, and packaging, where physical lots may exist but cost accounting is intentionally aggregated. Landed costs such as freight, duty, and taxes are capitalized into the receiving value, so the average remains accurate. The result is a consistent COGS and ending inventory balance without maintaining layered lot costs.
Does WAC use historical layers like FIFO or LIFO?
No. WAC blends all costs into a single average unit rate, so individual receipt layers are not preserved for issue costing the way FIFO or LIFO would require.
What happens after a new receipt under moving average costing?
The new average equals (current on-hand value + receipt value) ÷ (current on-hand quantity + receipt quantity), and that updated rate is used for subsequent issues.
What is the main accounting output of WAC?
It determines both cost of goods sold and ending inventory value using the same average unit cost, so every issue and remaining balance is valued consistently.