Glossary
What is weighted average cost?
How weighted average cost works, step by step, with the receipts and a sale that move it, and why it suits businesses that buy often.
Updated
In short
Weighted average cost values each unit of a product at total stock value divided by quantity, recalculated on every receipt. SimpleERP values all stock this way, applied by the database on every stock movement.
Weighted average cost is a stock valuation method that gives every unit of a product the same cost: total stock value divided by quantity on hand. Each receipt blends its cost into the average, and each sale or issue leaves at the current average. It smooths price changes and needs only quantity and value per product, which makes it practical for businesses that buy often.
Weighted average cost: a worked example
Lakshmi Steel's LED panel 2×2 over one month. Watch the average change on receipts and stay put on the sale.
| Movement | Qty | Rate | On hand | Stock value | Average cost |
|---|---|---|---|---|---|
| Opening stock | 100 | ₹1,100 | 100 | ₹1,10,000 | ₹1,100 |
| Bill from supplier | +150 | ₹1,160 | 250 | ₹2,84,000 | ₹2,84,000 ÷ 250 = ₹1,136 |
| Invoice to Ravi Stores | −80 | ₹1,136 | 170 | ₹1,93,120 | ₹1,136 |
| Bill from supplier | +30 | ₹1,200 | 200 | ₹2,29,120 | ₹2,29,120 ÷ 200 = ₹1,145.60 |
How is weighted average different from FIFO?
FIFO assumes the oldest units leave first and keeps each purchase as a separate layer with its own price. Weighted average blends all units into one cost. When prices rise, FIFO shows a slightly lower cost of sales and higher closing stock; over a year the totals are usually close. Read the weighted average cost guide for a longer walk-through.
FAQ
Questions, answered
What is the formula for weighted average cost?
New average = (stock value before the receipt + value of the receipt) ÷ (quantity before + quantity received). In the example, (₹1,93,120 + ₹36,000) ÷ (170 + 30) = ₹1,145.60. Issues do not change the average; they leave at it.
Is weighted average cost allowed for GST and income tax?
Yes. Indian accounting standard AS 2 allows weighted average or FIFO for stock valuation, and GST is charged on the selling price, not on your cost. Pick one method and use it every year, because switching changes your profit.
Does the average change when I sell?
No. A sale removes units at the current average, so value and quantity fall in proportion and the average stays the same. Only receipts at a different rate, such as bills, work order output or found stock, move it.
Is the average kept per warehouse?
In SimpleERP the average is per product across the whole business. Quantities are kept per warehouse, but a rack in the Ukkadam store and one in the Main godown carry the same cost, so a transfer never changes the books.
Related
Keep reading
Weighted average cost
How weighted average cost values stock and cost of goods sold, with the formula, a worked example and how it compares with FIFO.
Read moreStock valuation
Putting a rupee value on goods on hand with a costing method; the figure is the inventory asset and drives cost of goods sold.
Read moreCost of goods sold (COGS)
The cost of the stock sold in a period, subtracted from sales for gross profit.
Read more
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