weighted average

Examples of weighted average in the following topics:

• Average Cost Method

  • This gives a weighted-average unit cost that is applied to the units in the ending inventory.
  • There are two commonly used average cost methods: Simple Weighted Average Cost method and Moving-Average Cost method.
  • The following is an example of the weighted average cost method:
  • The Weighted-Average Method of inventory costing is a means of costing ending inventory using a weighted-average unit cost.
  • Weighted-average costing takes a middle-of-the-road approach.

• Cost Flow Assumptions

  • LIFO and weighted average cost flow assumptions may yield different end inventories and COGS in a perpetual inventory system than in a periodic inventory system due to the timing of the calculations.
  • In the LIFO system, the weighted average system, and the perpetual system, each sale moves the weighted average, so it is a moving weighted average for each sale.
  • In contrast, in the periodic system, it is only the weighted average of the cost of the beginning inventory, the sum cost of all the purchases, less than the cost of the inventory, divided by the sum of the beginning units and the total units purchased.

• Costing Methods Overview

  • There are four accepted methods of costing items: specific identification; first-in, first-out; last-in, first-out; and weighted-average.
  • The weighted-average method of inventory costing is a means of costing ending inventory using a weighted-average unit cost.
  • Companies most often use the weighted-average method to determine a cost for units that are basically the same, such as identical games in a toy store or identical electrical tools in a hardware store.

• Selecting an Inventory Method

  • When a company uses the weighted-average method and prices are rising, its cost of goods sold is less than that obtained under LIFO, but more than that obtained under FIFO.
  • A company can manipulate income under the weighted-average costing method by buying or failing to buy goods near year-end.
  • However, the averaging process reduces the effects of buying or not buying.
  • The following is an example of the weighted average cost method:

• Special Reporting

  • Earnings per share are calculated as net income, with preferred dividends/weighted number of shares outstanding.
  • For basic earnings per share, the weighted average of shares outstanding includes only actual stocks outstanding.
  • In diluted, the weighted average of shares outstanding is calculated as if all stock options, warrants, convertible bonds and other securities that could be transformed into shares are transformed.

• Reporting Irregular Items

  • An example, if a company switched from using a weighted-average method to using a LIFO method of valuating inventories, both values for the same time period should be calculated and compared.

• Preparation of the Income Statement

  • Basic:In this case "weighted average of shares outstanding" includes only actual stocks outstanding.
  • Diluted: In this case, "weighted average of shares outstanding" is calculated as if all stock options, warrants, convertible bonds, and other securities that could be transformed into shares are transformed.

• Impacts of Costing Methods on Financial Statements

  • The three main methods for inventory costing are First-in, First-Out (FIFO), Last-in, Last-Out (LIFO) and Average cost.
  • This method is the most easy to calculate; it takes a weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory.
  • With average cost, the results fall in between FIFO and LIFO.
  • Differentiate between the FIFO, LIFO and Average Cost inventory valuation methods

• Impact of Inventory Method on Financial Statement Analysis

  • The Average Cost method relies on average unit cost to calculate cost of goods sold and ending inventory.
  • Several variations on the calculation may be used, including weighted average and moving average.

• FIFO Method

  • The average cost method produces a cost flow based on a weighted average of unit costs.