An inventory valuation method that calculates the average cost per unit by dividing total cost of goods available by total units available, updating with each new purchase.
The Weighted Average Cost (WAC) method smooths out price fluctuations by averaging the cost of all units available for sale. Each time new inventory is purchased, the average cost is recalculated. This method is permitted under both Indian Accounting Standards (Ind AS 2) and IFRS. It falls between FIFO (which may overstate profits during inflation) and LIFO (not permitted in India). WAC is particularly suitable for businesses dealing in homogeneous goods where individual units are indistinguishable (e.g., fuel, chemicals, grains).
Opening stock: 200 units @ ₹50 = ₹10,000. Purchase 1: 300 units @ ₹55 = ₹16,500. Purchase 2: 100 units @ ₹60 = ₹6,000. Total: 600 units, ₹32,500. WAC = ₹32,500 ÷ 600 = ₹54.17/unit. If 400 sold: COGS = 400 × ₹54.17 = ₹21,668.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Use WAC when: goods are homogeneous and interchangeable, you want stable COGS figures, or tracking specific batches is impractical. Use FIFO when: goods are perishable, batch tracking is important, or you want ending inventory to reflect current market prices.
Yes. Indian Accounting Standards (Ind AS 2) permits both FIFO and Weighted Average Cost. For income tax purposes, either method is acceptable as long as it's consistently applied. LIFO is NOT permitted.
An inventory valuation method where goods purchased or manufactured first are sold or used first, meaning the oldest stock is consumed before newer stock.
An inventory valuation method where the most recently purchased or produced items are assumed to be sold first.
The direct costs attributable to the production or purchase of goods sold by a company during a specific period.
A ratio that measures how many times a company's inventory is sold and replaced over a specific period, indicating sales efficiency and inventory management.
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