What is Inventory Weighted Average Cost?

Businesses always need to know how much inventory is left and what is its worth. This is especially applicable to eCommerce firms. It is therefore of prime importance to calculate the inventory with the right inventory tracking method to manage the eCommerce demands and earn profits from them.

There are many variables in the calculation of inventory and hence keeping track of it may look gruesome. Fortunately, there are ample inventory tracking solutions to help businesses in continuing their operations. The "weighted average cost" is one of them.

What is Weighted Average Cost (WAC)?

"Inventory weighted average" or the "weighted average cost" is one of the four most common inventory valuation methods used in eCommerce accounting. WAC uses a weighted average to determine the amount of money that goes into the Cost Of Goods Sold (COGS) and inventory.

How to calculate inventory weighted average cost?

The total cost of goods purchased should be divided by the number of units available for sale to get the WAC. The cost of goods available for sale can be found by using the total amount of beginning inventory and recent purchases. The final calculation offers a weighted average value for every item available for sale.

Inventory Weighted Average Cost – Formula

Use the following simple formula to easily calculate WAC −

$$\mathrm{WAC =\frac{Cost\:of \:goods \:available\: for\: sale}{Total \:number \:of \:units \:in \:inventory}}$$

Advantages of Using the Inventory Weighted Average Method

The Inventory Weighted Average Method offers the following advantages −

Tracking Inventory Cost Easily

Keeping up with inventory counts is problematic and tracking the costs it takes to purchase and store inventory are additional burdens. Unlike First In First Out (FIFO) and Last In First Out (LIFO) methods that use a range of costs, the WAC method uses a blended average, making it easy to calculate and track inventory value.

Cost-effective Way to Manage Inventory

WAC is a superb cost-effective way to manage the inventory. WAC helps the eCommerce firms to realize their true position of inventory at any time, making it possible for the firms to manage the inventory in a productive manner.

Knowing the requirements and available inventory helps the firms keep and store items in an optimized fashion. This ensures proper availability and use of products as and when they are in demand.

Less Paperwork

Having a WAC management software can reduce paperwork to a great extent and in a profitable manner. As no other instrument and tools are required, one can ideally manage the inventory just by evaluating the WAC. This helps the businesses stay ahead of firms that do paperwork instead of using the software.

Updated on: 28-Oct-2021


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