9. Weighted Average

Let's talk about the weighted average inventory costing method, and the weighted average method is an alternative to FIFO, LIFO, and specific identification, which we've already talked about. Now, these are the three you're gonna see most often. So let's talk about weighted average. Now, the question we're trying to answer is something like, at the end of the year, we counted 30 units on hand. So at the end of the year, we went into the warehouse, and we said, "Okay, we've got 30 units." The question is, what does our ending inventory get valued at?

And so all of these methods are answers to this question. It depends on what method we use to determine what our ending inventory actually is. So let's look at a schedule. Let's say beginning inventory, we had 10 units at $3 for a total of $30 of inventory. Then we had a purchase.

We bought 50 units at $3.50, and that totaled to $175. And then we also had a purchase during the year of 40 units at $4 for a total of $160. So this is our purchasing schedule. Now, what this comes out to is 100 units for a total of $365. So this is our number of units, and this is the total dollar amount. Now, as you can see, it's pretty simple. If we wanna know dollars per unit, then all we have to do is do dollars per unit, and so we end up with $3.65 per unit.

Now we know that on average these units cost us $3.65. So we can go back to the problem and say we counted 30 units. What's our ending inventory amount? Well, it's just 30 times $3.65. Now, the question may also say, what is cost of goods sold?

Okay, well, how do we figure that out? We know that we had 100 units that were available for sale. All of these units, we had beginning inventory, added in some purchases, all of these units were available to be sold.

So we had 100, and we counted that at the end of the year, our ending inventory was 30, so we must have sold 70 units. So our cost of goods sold amount equals 70 units times $3.65 per unit. So our cost of goods sold is easily figured out as well, which leads us to this: cost of goods sold plus ending inventory equals our goods available for sale.

Because we had 100, and we said 30 were left over, which means 70 were sold. So we can easily say ending inventory plus cost of goods sold equals this goods available for sale number, and that's important 'cause you'll often see something like this problem right here where it says, "We counted 30 units on hand. Here's our purchasing schedule. What's the cost of goods sold?" And you may think to yourself, "Well, you didn't tell me how many goods you sold." But technically, they did tell you. They told you that there were 100, and 30 were left over, so you have to figure out that that means 70 were sold, 70 at an average cost of $3.65.