Weighted average cost (WAC, also called AVCO) assigns a blended unit cost to interchangeable inventory. A periodic calculation averages the goods available for the accounting period; a perpetual moving average updates when a new receipt changes the available quantity and cost. Neither method determines which physical lot should be picked.
Formula and the two methods
Weighted average unit cost = Cost of goods available / Units available
Periodic COGS = Units sold × Periodic weighted average cost
Ending inventory = Units remaining × Applicable average cost
Use costs and quantities for the same item, unit of measure and period. Returns, adjustments and negative inventory need an explicit policy. Keep full precision during the calculation and round currency for presentation at the end.
Under periodic WAC, all purchases in the period enter one average. Under moving average, each receipt recalculates the cost of the units then available; an earlier sale keeps the average applicable when that sale occurred. The two methods can therefore produce different results from the same purchases and total sales.
The IFRS Foundation's IAS 2 summary describes FIFO and weighted average as cost formulas for ordinarily interchangeable inventory, and specific identification for items that are not interchangeable. The accounting framework and business facts determine the applicable policy; physical lot tracking alone does not select it.
Worked example: preserve precision
Assume one interchangeable item with no tax, returns, loss or additional acquisition costs: