In CustomBooks™, weighted average is one of the available options to track the cost of items over time. Weighted average is generally useful for businesses with non-unique items, and provides benefit by smoothening the differences in cost per unit between ending inventory and cost of goods sold, unlike the First In, First Out method.
Increases to Inventory
As inventory is received into stock, a new cost per unit is calculated. Documents that increase inventory include:
Item Receipts
Bills
Sales Returns
Inventory Adjustments
Cost per Unit
When any of the above documents post, a new cost per unit is calculated for that item.
Cost per unit is calculated as the sum of the cost of all units on hand (also called 'goods available for sale') divided by the quantity of units available.
Because all units are assigned the same cost, the cost per unit of ending inventory is the same cost per unit of cost of goods sold, thus smoothening the relationship between the Balance Sheet and Income Statement.
Beginning Inventory balance on January 1 is 12 units at a cost of $42 each, $504 total.
Bill 100 dated January 15 adds 40 units at a cost of $68 each, $2,720 total.
Cost per unit after the purchase is:
$504 total cost of beginning inventory plus $2,720 cost of new units: $3,224 total cost
12 original units plus 40 new units: 52 total units
Cost per unit is: $3,224 divided by 52: $62/unit
Sales Invoice 101 is later created with a date of January 30 for 34 units sold.
Ending Inventory for January is:
52 units purchased minus 34 units sold: 18 units on hand
$62 cost/u multiplied by 18 units: $1,116
In February, an additional Bill was backdated to January 20, prior to the Sales Invoice, and recorded 10 units at a cost of $50 each, $500 total.
The new calculation for cost per unit after the second purchase is
$3,224 prior total cost plus $500 cost of new units: $3,724 total cost
52 prior total units plus 10 new units: 62 total units
Cost per unit is: $3,724 divided by 62: $60.06/unit
However, the Sales Invoice is already recorded using the $62 cost/unit that existed at the time of its posting.
To avoid the costing issue described above:
Enter transactions in chronological order whenever possible.
Avoid backdating sales documents once later-dated transactions have already posted.
Reconcile inventory frequently to ensure that available stock aligns with expected quantities.
Close the books to prevent reconciled periods from being altered.
Use draft status strategically to prevent premature posting when multiple documents are being entered for the same period.
Train users on weighted average behavior, so they understand why posting sequence can affect available inventory.