The Weighted Average is an optional Costing Method that can be chosen on the Above-Store Actual vs Theoretical Analysis report and is a more advanced Costing Method used for calculating Inventory Costs due to the fact that it considers quantity at the time the cost is recorded.
To understand Weighted Average better, let's take a look at the example below. This example lists the count details for a period, which spans the month of February, and begins with 3 cases of potatoes at $16.00/case from January's Ending Inventory Count.
Price Per Unit
|January 31||3||$16.00||$48.00||Beginning Inventory|
At the end of the month, the system will calculate the per-unit weighted average of the Beginning Inventory and all purchases.
|[(3 x $16.00) + (10 x $20.00) + (10 x $18.00) + (10 x $22.00)] / (3 + 10 + 10 + 10) = $19.64 per case|
$648 / 33 Total Cases = $19.64 per case
If the Standard Average is used, then the calculation of the above numbers would be as follows:
|( $16.00 + $20.00 + $18.00 + $22.00) / 4 = $19.00 per case|
At the end of the month, the final count is 12 cases. In using the per case cost, the amounts will be listed as follows:
- Weighted Average: 12 cases x $19.64 per case = $235.68
- Standard Average: 12 cases x $19.00 per case = $228.00
There is roughly a $7 variance between the Weighted Average and the Standard Average in this scenario. Using the Weighted Average rather than the Standard Average provides a greater level of precision when calculating costs.