Accounting Practices 501

Chapter 6

Inventory costing methods

(WAC)

Cathy Saenger, Senior Lecturer, Eastern Institute of Technology © Pearson 2011

Weighted Average

• For this system of movement in inventory, we throw it all together and calculate a weighted average cost price

• Suitable for bulk inventory

Ch6E - WAC 2

The following slides give an example of a perpetual inventory system using the WAC

method

Weighted AverageDate/details IN (purchases) OUT (Cost of sales) Balance (value of

inventory)

Ch6E - WAC 3

Aug 1 Balance 350 units @ $2 per unit (GST excl)

Aug 1 Balance

350 x $2 = $700

Weighted AverageDate/details IN (purchases) OUT (Cost of sales) Balance (value of

inventory)

Ch6E - WAC 4

Aug 4Purchased 150 units @ $3 per unit (GST excl)

Aug 1 Balance

350 x $2 = $700Aug 4 Purch =$1,15

0150 x $3 = $450

$2.30500 x

Find the total number of items, then the total amount and then divide the amount by the number of items (1,150 ÷ 500)

Weighted AverageDate/details IN (purchases) OUT (Cost of sales) Balance (value of

inventory)

Ch6E - WAC5

Aug 1 Balance

350 x $2 = $700Aug 4 Purch =$1,15

0150 x $3 = $450

$2.30500 x

Date Account Titles

4/8 450.00

Accounts Payable 517.50

Being entry to record credit purchase

GST Paid 67.50

Date Account Titles Ref no Debit Credit

General Journal

Inventory

Stock shown at GST exclusive

Weighted AverageDate/details IN (purchases) OUT (Cost of sales) Balance (value of

inventory)

Ch6E - WAC 6

Aug 12 Sold 400 units @ $6 per unit (GST excl

Aug 1 Balance

350 x $2 = $700Aug 4 Purch =$1,15

0150 x $3 = $450

$2.30500 x

The Cost of Sales is the weighted average price

Aug 12 Sale = $230400 x $2.30 = $920

$2.30100 x

Date/details IN (purchases) OUT (Cost of sales) Balance (value of inventory)

Ch6E - WAC 7

Aug 1 Balance

350 x $2 = $700Aug 4 Purch =$1,15

0150 x $3 = $450

$2.30500 xAug 12 Sale

(400 x $6)= $230400 x $2.30 =

$920$2.30100

x

Date Account Titles Ref no Debit Credit

12/8 Accounts Receivable (400x$6 + GST) 2,760

General Journal

Sales (400x$6) 2,400

GST Collected 360

920

Inventory 920

Cost of Sales

Weighted AverageDate/details IN (purchases) OUT (Cost of sales) Balance (value of

inventory)

Ch6E - WAC 8

Aug 21 Purchased 70 units @ $4 (GST excl)

Aug 1 Balance

350 x $2 = $700Aug 4 Purch =$1,15

0150 x $3 = $450

$2.30500 xAug 12 Sale = $230400 x $2.30 =

$920$2.30100

x

Find the total number of items, then the total amount and then divide the amount by the number of items ($510 ÷ 170)

Aug 21 Purch

= $51070 x $4 = $280 $3.00170 x

Weighted AverageDate/details IN (purchases) OUT (Cost of sales) Balance (value of

inventory)

Ch6E - WAC 9

Aug 29 Sold 110 units @ $6 (GST excl)

Aug 1 Balance

350 x $2 = $700Aug 4 Purch =$1,15

0150 x $3 = $450

$2.30500 xAug 12 Sale = $230400 x $2.30 =

$920$2.30100

xAug 21 Purch

= $51070 x $4 = $280 $3.00170 x

The Cost of Sales is the weighted average price

Aug 29 Sale = $180110 x $3.00 = $330

$3.0060 x

Weighted AverageDate/details IN (purchases) OUT (Cost of sales) Balance (value of

inventory)

Ch6E - WAC 10

Aug 31 Stock counts shows 59 units in stock

Aug 1 Balance

350 x $2 = $700Aug 4 Purch =$1,15

0150 x $3 = $450

$2.30500 xAug 12 Sale = $230400 x $2.30 =

$920$2.30100

xAug 21 Purch

= $51070 x $4 = $280 $3.00170 xAug 29 Sale = $180110 x $3.00 =

$330$3.0060 x

Aug 31 Stock loss = $1771x $3.00 = $3.00 $3.0059 x

Weighted AverageDate/details IN (purchases) OUT (Cost of sales) Balance (value of

inventory)

Ch6E - WAC 11

Aug 1 Balance

350 x $2 = $700Aug 4 Purch =$1,15

0150 x $3 = $450

$2.30500 xAug 12 Sale = $230400 x $2.30 =

$920$2.30100

xAug 21 Purch

= $51070 x $4 = $280 $3.00170 xAug 29 Sale = $180110 x $3.00 =

$330$3.0060 x

Aug 31 Stock loss = $1771x $3.00 = $3.00 $3.0059 x

Now we can find the total of the Cost of Sales and calculate Gross Profit

$1,253 $177

Date/details IN (purchases) OUT (Cost of sales) Balance (value of inventory)

Ch6E - WAC 12

Aug 1 Balance

350 x $2 = $700Aug 4 Purch =$1,15

0150 x $3 = $450

$2.30500 xAug 12 Sale = $230400 x $2.30 =

$920$2.30100

xAug 21 Purch

= $51070 x $4 = $280 $3.00170 xAug 29 Sale = $180110 x $3.00 =

$330$3.0060 x

Aug 31 Stock loss = $1771x $3.00 = $3.00 $3.0059 x

$1,253 $177

Sales [(400 + 110) x $6) $3,060Less Cost of Sales $1,253

$1,807Gross Profit

And the value of our Inventory is $177

Weighted Average

• You could find a discrepancy in figures when using the WAC method. This would be due to rounding. We have to remember that this is a computerised system with higher accuracy than we can calculate

Ch6E - WAC 13

Ch6E - WAC 14

Man, I’m so tired after all those calculations!!!