Weighted Average Cost (WAC): Definitions, Examples and Best Practices

Weighted average cost (WAC) is a method of calculating your cost of goods sold and inventory value. It involves calculating the average cost of all units you have available for sale at a specific time.

WAC is generally simpler and less recordkeeping-intensive than other methods like FIFO, LIFO and specific identification, and it can provide a more consistent cost basis when prices are changing by ‘smoothing out’ price volatility.

Key takeaways

• WAC assigns every one of your units the same average cost. You calculate it by dividing the total cost of goods available for sale by the total units available for sale.

• Goods available for sale include what you had on hand at the start of the period, plus what you bought or produced during that same period.

• To get your COGS: multiply WAC by the number of units you sold or used. And to get your ending inventory: multiply WAC by the units you have left.

• If you’re calculating a periodic WAC, that means you calculate one average cost for the whole period. If you’re calculating a moving WAC, it means you recalculate it after each purchase during the period.

• When prices are rising, WAC should land between FIFO and LIFO for both COGS and ending inventory.

• WAC works best for commingled, interchangeable items: grain in a bin, bulk feed, fuel in a tank, or gravel in a stockpile.

What is the weighted average cost method?

When inventory items that are difficult to separate and track individually are purchased or produced at different prices and then sold or consumed, businesses often choose one of four costing methods to provide a consistent way to calculate inventory and cost of goods sold:

1. First-in, first-out (FIFO)

2. Last-in, first-out (LIFO)

3. Weighted average cost (WAC)

4. Specific Identification

Unlike FIFO and LIFO, which assume that certain items are sold or used first, and unlike specific identification which makes no assumptions about costs and calculates them precisely, the weighted average cost method calculates an average cost for each unit.

Weighted average cost formula

Calculating COGS and inventory values using the weighted average cost method often involves three steps:

1. First, the total cost of inventory is calculated by multiplying the number of units in each lot by their unit price, and then adding up the total cost of each lot. This includes any inventory you have on hand at the start of the period (your beginning inventory) and any purchases you make during the period.

2. That number is then divided by the total quantity to get a weighted average cost (WAC) per unit. That includes both your beginning units and any units you purchased during the period.

3. The resulting WAC can then be used to calculate COGS by multiplying WAC by the number of units sold or used, or ending inventories by multiplying WAC by the total number of remaining units.

Expressed as a formula, the weighted average cost of inventory is:

Weighted average cost (WAC) = Total cost of inventory / Total quantity

Weighted average cost may be used under either a periodic inventory system—where the average cost is calculated at the end of the period—or a perpetual (moving) average system, where the average is recalculated each time new inventory is received.

Weighted average cost: an example

Let’s say a dairy farmer purchases the corn silage they need to get through feeding season in several batches. Each batch costs a different amount due to changes in local availability and prices:

Let’s say the operation uses 250 tons of corn silage during the feeding season, and wants to calculate its feed costs for that period, as well as the value of the remaining feed inventory.

Under the weighted average cost method, they would take the total cost of all the corn silage purchased ($4,000 + $4,500 + $5,000 = $13,500) and divide it by the total number of tons purchased (300 tons) to arrive at a weighted average:

Weighted average cost = Total Cost of Inventory / Total Quantity

Weighted average cost = $13,500 / 300 tons

Weighted average cost = $45/ton

To calculate total feed costs under this method, you multiply total tons consumed by the weighted average cost:

Total feed costs = 250 tons x $45/ton

Total feed costs = $11,250

To calculate ending inventory value, multiply the remaining inventory amount by the weighted average cost:

Ending inventory value = 50 tons x $45/ton

Ending inventory value = $2,250

Why do people use weighted average cost?

People use the weighted average cost (WAC) method primarily for its practicality and simplicity. It is especially useful when inventory items are commingled and cannot be individually identified—such as grain, milk, or oilseeds stored together in a common silo or tank, diesel in a bulk fuel tank, or gravel in a stockpile—making it impossible to trace which batch came from which purchase. By averaging costs across all units, WAC provides a fair representation of the combined cost of goods.

Additionally, it reduces the recordkeeping burden compared with methods like FIFO or specific identification, while smoothing out price fluctuations and offering a more consistent, stable cost basis for inventory valuation and financial reporting.

What are the downsides?

The weighted average cost (WAC) method may not always reflect current market conditions accurately, as it can obscure specific cost variations and produce different tax and profit outcomes compared to FIFO or LIFO.

Additionally, under the moving average cost method, a new weighted average must be recalculated each time you receive new inventory to update the per-unit cost. This ongoing recalculation can be time-consuming by hand and may make the method impractical or cost-prohibitive for some operations that track inventory manually.

FIFO, LIFO, specific identification and weighted average cost: which one should I use?

The choice between FIFO, LIFO, specific identification and weighted average cost usually comes down to your business’s accounting, financial and tax goals.

If you grow perishable crops or fresh produce like vegetables, fruit, or cut flowers, the FIFO (First-In, First-Out) method is a logical choice because older goods must be sold first to prevent spoilage.

LIFO can be advantageous when input prices (i.e., fuel, feed, livestock for resale) are rising, because it matches more recent, higher input costs against current revenues, which could potentially reduce taxable income.

For producers who cultivate, raise or sell high-value, individually identifiable items such as purebred cattle, horses, orchard trees or vineyard lots, the specific identification method can be appropriate. This approach tracks the actual cost and sale of each unique item—for example, a stud farm might record the full cost of raising and selling each registered horse.

Learn more: Which Farm Inventory Valuation Method Should I Use?

Frequently asked questions

How do you calculate weighted average cost?

To get your weighted average cost, divide the total cost of goods available for sale (beginning inventory and purchases) by the total units available for sale. Then, multiply the result by units sold or used to get COGS; multiply the result by units left to get ending inventory.

Does weighted average cost include beginning inventory?

Yes. Units on hand at the start of the period, and their cost, go into both the total cost and the total quantity. Leaving them out overstates or understates the average whenever prices have changed.

What’s the difference between periodic weighted average and moving average?

Periodic weighted average calculates one average at the end of the period and applies it to everything sold or used. On the other hand, you recalculate a moving average after each purchase and apply the current figure to each sale or use, so results differ slightly when prices change.

Is weighted average better than FIFO?

Neither is necessarily better; it depends on the types of goods you have and your business goals. If you keep perishable goods, FIFO matches how they physically move and typically values leftover inventory closer to current prices. Weighted average is simpler for commingled items that you can’t tell apart, and it tends to smooth out price swings. When prices rise, FIFO shows lower COGS than weighted average.

Can I use different costing methods for different items?

Yes. Many businesses use FIFO for some items and weighted average for others, such as FIFO for packaged inputs and weighted average for grain or bulk feed. We recommend checking in with your accountant if you have questions about an item’s costing method, and see our guide to inventory accounting for the basics of tracking inventory.

Use Ambrook to take stock of your finances

Ambrook brings bookkeeping, payments, and business insights into one place for operators. With Ambrook Inventory, you can choose the costing method that works for each item (like FIFO or weighted average). Then, set up your items and let the system calculate COGS for you as you sell or use inventory.

Want to learn more? Schedule a demo today.

This resource is provided for general informational purposes only. It does not constitute professional tax, legal, or accounting advice. The information may not apply to your specific situation. Please consult with a qualified tax professional regarding your individual circumstances before making any tax-related decisions.