What is simple average method weighted average method?
In calculating a simple average, or arithmetic mean, all numbers are treated equally and assigned equal weight. But a weighted average assigns weights that determine in advance the relative importance of each data point. A weighted average is most often computed to equalize the frequency of the values in a data set.
The average is the sum of all values divided by the number of values. In contrast, the Weighted Average is value multiplied by the weight, and added to find a solution. An Average is a mathematical calculation, whereas the Weighted Average is used in finance.
Basic Definition
The average is calculated by summing the observations given in the sample and dividing that sum by the number of observations in the sample. A weighted average is the type of average in which every observation in the given data set will be assigned weight before the summation to a sole average value.
In simple average method, issue price of materials are fixed at average unit price. Simple average is an average of price without considering the quantities involved. The average price is calculated by dividing the total of the rates of the materials in the stores by the number of rates of prices.
The weighted average is a measure that takes into consideration the different degrees of the numbers in a data set. When calculating a weighted average, before the final calculation is completed, each number in the data set is multiplied by a predetermined weight.
The problem with finding the mean of a set of numbers is that it does not account for the relative importance of those numbers. Weighted averages correct for this flaw, assigning importance to each number and factoring that importance in when calculating the average.
While the SMA considers all data points equally, the WMA gives more weight to recent price movements.
Average cost method is a simple inventory valuation method, especially for businesses with large volumes of similar inventory items. Instead of tracking each individual item throughout the period, the weighted average can be applied across all similar items at the end of the period.
That's the formula to memorize: total cost / total units = weighted average cost. It's called a moving average because we are always recalculating it. In the periodic system, we took total cost for the year and divided it by total units (for each individual item).
Average is sum of all the values and divided by number of values. In contrast, the weighted average is values multiplied by the weight and divide by sum of weight. In below example we have different items and their respective price, quantity sold and sales value which is their quantity sold* price.
What is an example of a weighted average?
Calculate the sum of all the weighted values to arrive at your weighted average.Example:7.5 + 15.2 + 16 + 44.1 = 82.8The weighted average is 82.8%. Using the normal average where we calculate the sum and divide it by the number of variables, the average score would be 76%.
The advantages of using weighted average are that it smoothes out the fluctuations in inventory costs, it avoids the extreme results of FIFO or LIFO in periods of changing prices, and it requires less record-keeping and tracking of inventory batches.
Calculating weighted averages is key to analyzing data. Weighted averages are used to maintain accuracy of data distribution, reducing the impact of irrelevant outlier data points to paint a more accurate picture of the data conclusion as a whole.
Simple Weighted Mean (recommended) - The difference between this aggregation method and 'Weighted mean of grades' is that the weight of each item is simply its maximum grade. A 100 point assignment has a weight of 100; a 10 point assignment has a weight of 10; items with higher total scores are weighted greater.
The disadvantages of using weighted average are that it does not reflect the actual flow or replacement of goods, it may not capture the true profitability or efficiency of the business, and it may not be suitable for businesses that sell unique or perishable items.
The way to figure this out is to multiply each score by its weight (percentage) and add the products together, then divide by the sum of the weights. These scores are the student's weighted average. In a single set of test scores, each score, or quantity, is equally valuable.
A major advantage of weighted moving averages is that they yield a smoother estimate of the trend-cycle.
However, one disadvantage is that it can be more volatile due to its sensitivity to recent prices. A rising WMA indicates that the price is moving up, while a falling weighted moving average puts the price movement in a downward direction.
Using the weighted moving average to determine trend direction is more accurate than the simple moving average, which assigns identical weights to all numbers in the data set.
For example, assume there are five students in a small class with the following scores on a certain test—say math—82, 78, 83, 91 and 85. The teacher is interested in calculating their average score. Then the simple average would be 83.8 and is calculated as: SA = (82 + 78 + 83 + 91 + 85) / 5 = 83.8.
What is another name for simple average?
| arithmetic mean | average |
|---|---|
| par | norm |
| normal | mode |
| rule | midpoint |
| usual | median |
First in, first out (FIFO) is an inventory method that assumes the first goods purchased are the first goods sold. This means that older inventory will get shipped out before newer inventory and the prices or values of each piece of inventory represents the most accurate estimation.
What is the weighted average cost (WAC) method? The weighted average cost method calculates the average cost of your inventory, per unit. You can calculate WAC by dividing your cost of goods sold (COGS) by the total number of units in your inventory.
To calculate the weighted average in Excel, you must use the SUMPRODUCT and SUM functions using the following formula: =SUMPRODUCT(X:X,X:X)/SUM(X:X) This formula works by multiplying each value by its weight and combining the values. Then, you divide the SUMPRODUCT but the sum of the weights for your weighted average.
Usually when you calculate an average, all of the numbers are given equal significance; the numbers are added together, and then, divided by the number of numbers. With a Weighted Average, one or more numbers is given a greater significance, or weight.
