The weighted average cost (WAC) method is one of three accepted inventory valuation methods under both GAAP and IFRS. Here is how it works in practice.
The weighted average cost formula
WAC per unit = Total cost of inventory ÷ Total units available
Applied perpetually (after each purchase) or periodically (at end of period).
Example
Beginning inventory: 100 units at $10 = $1,000 Purchase 1: 200 units at $12 = $2,400 Purchase 2: 150 units at $15 = $2,250
Total: 450 units, $5,650 total cost WAC = $5,650 ÷ 450 = $12.56 per unit
If you sell 200 units: COGS = 200 × $12.56 = $2,511 Ending inventory: 250 × $12.56 = $3,139
WAC vs FIFO vs LIFO
| Method | COGS in rising prices | Ending inventory | Taxes |
|---|---|---|---|
| FIFO | Lower (older cost) | Higher (recent cost) | Higher |
| LIFO | Higher (recent cost) | Lower (older cost) | Lower (US GAAP only) |
| WAC | Middle | Middle | Middle |
Note: LIFO is not permitted under IFRS. US companies can use it for tax deferral.
When to use WAC
WAC is preferred when: inventory is homogeneous (all units are interchangeable), purchase prices fluctuate, and you want to smooth COGS rather than show peaks/troughs.
Use the weighted average calculator to compute weighted averages for any set of values and weights.