What Kinds of Companies Choose Weighted Average Costing?

Weighted average costing is one among many different types of inventory cost accounting methods that companies use. Other common methods include the more common last-in, first-out, or LIFO method, and the first-in, first-out, or FIFO method. Standard cost accounting simply uses a fixed price to determine inventory cost. Weighted average valuations involve proportional treatment of both the cost of goods sold and the inventory in stock at the time of valuation. This means that both are treated the same when it comes to determining value. Other methods, such as the LIFO or FIFO methods, may ascribe different values to older inventory and newer inventory.


Manufacturers of all types rely upon the weighted average costing methods because inventories either are stockpiled or intermingled so that it is difficult to differentiate between older and newer goods. For instance, in chemical manufacturing, one batch of a chemical may be mixed with another batch of the same chemical. Because it would be difficult to account for the mixture, the company uses a weighted average.


Weighted average costing often is utilized in the agricultural sector. Beans, corn, grain and any other product that is grown in a field and mass harvested cannot be accounted for individually. Similarly, certain animal products in this sector also are collected in large quantities and are not differentiated on an individual basis. Weighted average costing makes it simpler to account for these types of items.

Fuel Companies

The gas and petroleum industries utilize the weighted average costing method for inventory purposes. The extraction, collection and storage of liquid fuels and related products makes it necessary for those involved in both the manufacture and sale of these products to use this inventory method. The inability to differentiate one batch of fuel from another when they are stored together makes weighted average costing the proper solution for keeping track of inventory.


Understanding how some specific industries use the weighted average calculation can help make better sense of the methodology. The weighted average of inventory is simple to calculate and can be determined by using two or more lots of the same inventory item. For instance, assuming that a pharmaceutical distributor purchased 10,000 Viagra pills at $1 each and then later purchased another 7,500 at $1.10 each, average weighted cost would be $1.04 per pill. This would be determined in the following manner: 10,000 x $1 = $10,000; 7,500 x $1.10 = $8,250. These two figures are added together to get a total cost of $18,250. This is then divided by the total number of units, 17,500, which results in a weighted average of $1.04.