The **Average Cost (Weighted-Average)** method is a common inventory valuation technique used to assign an average cost to each unit of inventory. This calculator determines the monetary value of your ending inventory by dividing the total cost of goods available for sale by the total number of units available for sale.
Average Cost Ending Inventory Calculator
Calculated Ending Inventory Cost
Calculation Breakdown
Average Cost Ending Inventory Formula
1. Weighted Average Cost per Unit (WAC) =
$$\frac{\text{Beginning Inventory Cost} + \text{Purchases Cost}}{\text{Beginning Inventory Units} + \text{Purchases Units}}$$
2. Ending Inventory Cost =
$$\text{Ending Inventory Units} \times \text{WAC}$$
Variables Used in the Calculator
- Beginning Inventory Cost ($): The total cost of inventory held at the start of the period.
- Beginning Inventory Units: The number of physical units of inventory held at the start of the period.
- Purchases Cost ($): The total cost of new inventory acquired during the period (including freight-in, less discounts).
- Purchases Units: The number of new physical units purchased during the period.
- Ending Inventory Units: The number of physical units remaining in stock at the end of the period.
Related Inventory Calculators
Explore other essential inventory and cost accounting tools:
- FIFO Inventory Valuation Calculator
- LIFO Inventory Valuation Calculator
- Cost of Goods Sold (COGS) Calculator
- Inventory Turnover Ratio Calculator
What is the Average Cost Inventory Method?
The Average Cost method (also known as the Weighted-Average method) is one of the three primary inventory valuation methods, alongside FIFO (First-In, First-Out) and LIFO (Last-In, First-Out). This method is based on the assumption that all units of a particular type of inventory are indistinguishable and can be valued at the average cost of all units available for sale during the accounting period.
Under this approach, the average cost per unit is calculated by dividing the total cost of goods available for sale (Beginning Inventory Cost + Purchases Cost) by the total number of units available for sale (Beginning Units + Purchases Units). This calculated average cost per unit is then applied to both the units sold (to determine Cost of Goods Sold) and the units remaining in stock (to determine the value of Ending Inventory).
This valuation method is particularly useful for companies that sell items that are homogeneous and difficult to track individually, such as bulk liquids, grains, or identical small parts. It tends to smooth out price fluctuations because it uses a single average cost for the entire period, leading to a Cost of Goods Sold and Ending Inventory value that falls between those calculated by FIFO and LIFO.
How to Calculate Average Cost Ending Inventory (Example)
Suppose a company has the following data:
- Beginning Inventory Cost: $1,000 (200 units @ $5.00/unit)
- Purchases Cost: $5,400 (600 units @ $9.00/unit)
- Ending Inventory Units: 300 units
Here are the steps to find the Ending Inventory Cost:
- Calculate Total Cost of Goods Available for Sale (COGAS): $1,000 (\text{Beginning Cost}) + $5,400 (\text{Purchases Cost}) = $6,400$
- Calculate Total Units Available for Sale (UAS): $200 (\text{Beginning Units}) + 600 (\text{Purchases Units}) = 800 \text{ units}$
- Determine the Weighted Average Cost per Unit (WAC): $$\text{WAC} = \frac{$6,400 (\text{COGAS})}{800 (\text{UAS})} = $8.00 \text{ per unit}$$
- Calculate the Ending Inventory Cost: $300 (\text{Ending Units}) \times $8.00 (\text{WAC}) = $2,400$
The Ending Inventory Cost under the Average Cost method is $2,400.
Frequently Asked Questions (FAQ)
The Average Cost method is often chosen because it is simple to apply and smooths out the effects of erratic price changes, resulting in less volatile financial statements. It’s also preferred when inventory items are physically identical and mixed together.
Q: Is the Average Cost method accepted under GAAP and IFRS?Yes, the Average Cost (Weighted-Average) method is accepted under both U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards).
Q: Does the Average Cost method usually result in lower or higher profits than FIFO?In a period of rising prices (inflation), the Average Cost method generally results in a Cost of Goods Sold (COGS) that is lower than LIFO but higher than FIFO, leading to a net income value that falls between the two.
Q: What is the maximum number of ending units I can have?Your ending inventory units cannot exceed the total units available for sale (Beginning Inventory Units + Purchases Units). The calculator will notify you if this physical limit is exceeded.