How to calculate weighted average cost
To calculate your weighted average cost, start by gathering your data. Collect the following information for each item in your inventory:
- The number of products you have in your inventory (units available for sale)
- The total purchase price of the items in your inventory
Once you have these, the weighted average cost formula is as simple as it gets:
WAC = COGS / units available for sale
Example calculations
Say your apparel store started the year with 20 pairs of last year’s sneakers for a total cost of $600, or $30 per pair. You quickly sold half of them in January, so the next month, you bought another 5 pairs for $125 ($25 each) from a different supplier.
However, February was a particularly slow month, and you didn’t sell any. Sales had picked up by March, and you managed to move 15 pairs out the door, so at the end of the month, you went back to the second supplier to get another 20 pairs. They gave you a 10% discount for the larger order, so you got that batch for $450 ($22.5 per pair).
Condensing it all down — by the end of the first quarter, your figures look like this:
| January | February | March | |
|---|---|---|---|
| Starting inventory | 20 x $30 = $600 | 10 | 15 |
| Purchased | 0 | 5 x $25 = $125 | 20 x $22.5 = $450 |
| Sold | 10 | 0 | 15 |
Your COGS at the end of the first quarter is $600 + $125 + $450 = $1,175
Meanwhile, your units available for sale add up to 20 + 5 + 20 = 45
WAC = 1,175 / 45 = $26.11
For the 25 pairs of sneakers that you sold in Q1, you will allocate $26.11 per unit. The remaining 20 pairs will be your opening inventory for Q2. So, you’ll start April with these figures:
- 20 units x $26.11 WAC = $522.2 in COGS
- $1,175 – $522.2 = $652.8 in opening inventory
To satisfy your customer’s curiosity, you’re not making any profit on your sneakers sold in the clearance sale. You’re actually losing $1.11 per pair, but it helps you recover most of your investment, and the small loss certainly beats keeping dead stock on your shelves.
Besides, your first quarter was profitable when you were selling the sneakers for $40, so you’re not in the red at the end of the day.
