11.2 Weighted-Average & Moving-Average Cost Methods
Key Takeaways
- Periodic weighted-average unit cost equals total cost of goods available divided by total units available: Quarry & Wick’s $5,010 ÷ 230 = $21.7826; 60 unsold units extend to $1,306.96 and residual COGS is $3,703.04.
- Perpetual moving-average recalculates after each purchase (cost on hand ÷ units on hand); sales use the average then in effect and do not themselves create a new average except as a remainder check.
- After Quarry & Wick’s Jan 8 purchase the moving average is $19.20, so the Jan 12 sale of 45 units costs $864.00—not $900 LIFO, $820 FIFO, or 45 × the year-end $21.7826.
- Moving-average ending inventory on this card is $1,379.67 and COGS is $3,630.33; that is not the same as periodic weighted average because early cheap units influenced early sales.
- On the same periodic data, FIFO inventory $1,480 / COGS $3,530, weighted average $1,306.96 / $3,703.04, and LIFO $1,120 / $3,890; in rising prices FIFO inventory is highest and LIFO COGS is highest.
Why average costing sits between FIFO and LIFO
AIPB’s inventory skill list names weighted-average and moving-average costing next to FIFO and LIFO. This independent OpenExamPrep section uses the same Quarry & Wick Outfitters January data from section 11.1 so you can compare methods. It is not an AIPB publication and does not claim official approval, review, partnership, or exact equivalence with AIPB or the Mastering Inventory workbook.
Average costing does not peel a named invoice layer at sale. It blends costs. Periodic weighted-average blends once, at period-end, using all units available. Perpetual moving-average blends again after every purchase; each sale then uses the current average. Sales do not change the average (except by reducing units and dollars in equal proportion). Purchases do.
In rising prices, average COGS and ending inventory fall between FIFO (lowest COGS, highest inventory) and LIFO (highest COGS, lowest inventory). That sandwich is a check on your arithmetic before you pick an exam choice.
Periodic weighted-average — one blend for the whole period
Weighted-average unit cost (periodic) =
Total cost of goods available for sale ÷ Total units available for sale
Quarry & Wick:
$5,010 ÷ 230 units = $21.782608...
Rounding policy used in this section: carry the unit cost to four decimal places ($21.7826), extend ending inventory in dollars and cents, and take COGS as the residual so the $5,010 pool still foots. If you round the unit cost to two decimals ($21.78) and extend both inventory and COGS independently, the two sides may not add to $5,010. Exam items usually tell you how many decimals to keep; if they do not, four decimals plus a residual COGS is defensible bookkeeping.
Ending inventory (60 units) = 60 × $21.7826 = $1,306.956 → $1,306.96.
COGS = $5,010.00 − $1,306.96 = $3,703.04.
Cross-check the 170 sold: 170 × $21.7826 = $3,703.042 → $3,703.04 after the residual tie-out.
| Periodic weighted-average | Amount |
|---|---|
| Units available | 230 |
| Cost of goods available | $5,010.00 |
| Unit cost (4 d.p.) | $21.7826 |
| Ending inventory (60) | $1,306.96 |
| COGS (170, residual) | $3,703.04 |
Journal timing (periodic): no COGS at each sale. At month-end, close beginning inventory and purchases into COGS (or into a merchandising summary) and establish ending inventory at $1,306.96. The average is not recomputed after the Jan 8 purchase alone; the $25 January 25 units are in the blend even for the Jan 12 sale. That is the conceptual price of waiting until period-end.
A simple average of invoice prices—($18 + $20 + $23 + $25) ÷ 4 = $21.50—is not a weighted average. It treats a 40-unit beginning layer the same as an 80-unit purchase. Weighted-average uses dollars and units, not the mean of list prices.
Perpetual moving-average — recompute after each purchase
A moving-average (perpetual average) card keeps quantity, total cost, and unit cost. After each purchase,
New average = Total cost of units on hand ÷ Units on hand.
A sale multiplies units sold by the average in effect at that moment and reduces quantity and total cost. Do not recompute the average because of the sale except as a remainder check (remaining cost ÷ remaining units should still equal the same average, ignoring rounding).
Start: 40 units, $720.00, average $18.0000.
Jan 8 purchase 60 @ $20 = $1,200.
On hand: 100 units, $720 + $1,200 = $1,920.
Average = $1,920 ÷ 100 = $19.2000 exactly.
Jan 12 sale 45 uses $19.20, not $18, not $20, not a year-end $21.78.
COGS = 45 × $19.20 = $864.00.
Remain: 55 units, $1,920 − $864 = $1,056.00 (55 × $19.20).
Jan 18 purchase 80 @ $23 = $1,840.
On hand: 135 units, $1,056 + $1,840 = $2,896.00.
Average = $2,896.00 ÷ 135 = $21.451851... → $21.4519 (four decimals).
Keep the dollar total at $2,896.00; the four-decimal average is for the next sale extension.
Jan 22 sale 70 × $21.4519 = $1,501.633 → $1,501.63 COGS.
Remain: 65 units, $2,896.00 − $1,501.63 = $1,394.37.
Jan 25 purchase 50 @ $25 = $1,250.
On hand: 115 units, $1,394.37 + $1,250.00 = $2,644.37.
Average = $2,644.37 ÷ 115 = $22.994521... → $22.9945.
Jan 28 sale 55 × $22.9945 = $1,264.6975 → $1,264.70 COGS.
Remain: 60 units, $2,644.37 − $1,264.70 = $1,379.67.
Check: 60 × $22.9945 = $1,379.67.
Moving-average COGS = $864.00 + $1,501.63 + $1,264.70 = $3,630.33.
Moving-average ending inventory = $1,379.67.
Sum = $5,010.00.
| Date | What happened | Units on hand | Total cost | Average used next |
|---|---|---|---|---|
| Jan 1 | Beginning | 40 | $720.00 | $18.0000 |
| Jan 8 | Buy 60 @ $20 | 100 | $1,920.00 | $19.2000 |
| Jan 12 | Sell 45 @ $19.20 | 55 | $1,056.00 | $19.2000 (unchanged by sale) |
| Jan 18 | Buy 80 @ $23 | 135 | $2,896.00 | $21.4519 |
| Jan 22 | Sell 70 @ $21.4519 | 65 | $1,394.37 | $21.4519 |
| Jan 25 | Buy 50 @ $25 | 115 | $2,644.37 | $22.9945 |
| Jan 28 | Sell 55 @ $22.9945 | 60 | $1,379.67 | $22.9945 |
Jan 12 moving-average entry:
Dr Cost of Goods Sold 864
Cr Merchandise Inventory 864
Notice $864 is not periodic LIFO’s $900, not FIFO’s $820 for that same sale, and not 45 × $21.7826. If your exam choice equals 45 × the year-end weighted average, you applied periodic average to a perpetual sale.
Same data, three periodic methods — plus the two perpetual cousins
Compute periodic FIFO on this same Quarry & Wick set (Chapter 10’s method, new layers). The newest 60 units are ending inventory: 50 @ $25 + 10 @ $23 = $1,250 + $230 = $1,480. COGS = $5,010 − $1,480 = $3,530. Perpetual FIFO agrees on this data: the Jan 12 sale takes beginning $18 units that are already on hand, so timing does not reshuffle FIFO the way it reshuffles LIFO.
Perpetual FIFO sale check (not a repeat of Chapter 10’s card): Jan 12 costs 40 @ $18 + 5 @ $20 = $820; Jan 22 costs 55 @ $20 + 15 @ $23 = $1,445; Jan 28 costs 55 @ $23 = $1,265; COGS $3,530; remainder 10 @ $23 + 50 @ $25 = $1,480.
| Method | Ending inventory (60 units) | COGS (170 units) |
|---|---|---|
| Periodic (and perpetual) FIFO | $1,480.00 | $3,530.00 |
| Moving average (perpetual) | $1,379.67 | $3,630.33 |
| Periodic weighted average | $1,306.96 | $3,703.04 |
| Perpetual LIFO | $1,135.00 | $3,875.00 |
| Periodic LIFO | $1,120.00 | $3,890.00 |
Rising prices: FIFO inventory is highest and FIFO COGS is lowest. Periodic LIFO inventory is lowest and periodic LIFO COGS is highest. Averages sit in the middle. Moving-average inventory ($1,379.67) is higher than periodic weighted-average inventory ($1,306.96) because early cheap units influenced early sales, so more of the later high-cost purchases remain in the 60 units. That is the perpetual/periodic split for averages, analogous to LIFO’s $15 split.
If ending inventory + COGS does not equal $5,010, you have a rounding or unit-count error. Do not “fix” it by changing the method’s definition.
The bar chart below uses periodic FIFO, weighted-average (dollars rounded), and LIFO so the three methods share one period-end rule. Weighted-average inventory is plotted at $1,307 and COGS at $3,703; the table above keeps the cent-accurate $1,306.96 and $3,703.04.
Choosing and staying with a method
U.S. GAAP allows FIFO, LIFO, and average (and specific identification when it fits). Consistency for each inventory class matters more than chasing last month’s nicest margin. A change is not a casual software toggle; it is an accounting-method change with disclosure and, for tax LIFO, the conformity rule from section 11.1.
Small-business software often defaults to moving-average on a perpetual item card, or to FIFO. If the owner elected LIFO for tax, the item card must actually apply LIFO, not an unnoticed average. AIPB’s Part 3 final is open-book at 70%; an open book does not rescue a card that blends the wrong method.
Realistic scenarios
Scenario A — “just average the three invoice prices.” ($18 + $20 + $23 + $25) ÷ 4 = $21.50 ignores that 80 units arrived at $23 and only 40 began at $18. Weighted-average uses $5,010 ÷ 230.
Scenario B — sale posted before the matching receipt. Moving-average will cost the sale at the old average, then the late receipt will recompute. If the receipt actually arrived first, correct the order; do not leave a known cut-off error in the card.
Scenario C — mixing periodic WA with a perpetual sale. The Jan 12 sale is 45 × $19.20 = $864 on a moving-average card. Using 45 × $21.7826 imports the January 25 purchase into a January 12 sale.
Traps
- Simple-averaging invoice prices instead of weighting by units
- Recalculating the moving average after a sale as if the sale were a purchase
- Using year-end weighted-average cost on a mid-month perpetual sale
- Expecting moving-average dollars to equal periodic weighted-average dollars
- Forgetting that FIFO, LIFO, and average must all consume the same $5,010 and 230 units
- Rounding unit cost to two decimals on both inventory and COGS so they no longer add to goods available
Quarry & Wick has $5,010 of cost in 230 units available and 60 units unsold. Using periodic weighted-average cost to four decimal places ($21.7826), cents on the inventory extension, and residual cost of goods sold, what is ending inventory?
After Quarry & Wick’s January 8 purchase of 60 units @ $20, the perpetual card holds 100 units at $1,920. What amount should the January 12 moving-average sale of 45 units debit to cost of goods sold?
Which statement correctly describes the perpetual moving-average cost method?