Weighted Average Inventory Costing Method

Understanding Inventory Weighted Average Cost and Inventory Valuation

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It'southward hard to determine if you're going to attain acquirement goals if you don't know much your inventory is worth. For ecommerce businesses, keeping track of inventory and its value is crucial. By choosing the right inventory tracking method, you tin amend manage your ecommerce inventory and forecast potential turn a profit.

Since so many variables play into determining the value of inventory (e.one thousand., manufacturing costs, production demand, price of goods sold (COGS), etc.), knowing the electric current worth of your inventory can seem like a moving target. Fortunately, there are several inventory valuation methods used in ecommerce that make the process easier. One of the most popular methods for ecommerce businesses is weighted boilerplate toll (WAC).

In this post, we'll go over how to summate WAC, how this method compares to other inventory valuations methods, and how properly tracking inventory tin improve your bottom line.

What is the inventory weighted average?

Inventory weighted average (also known as 'weighted average cost') is 1 of the four most common inventory valuation methods used in ecommerce bookkeeping . This method uses a weighted boilerplate to determine the corporeality of money that goes into COGS and inventory.

How to summate inventory weighted average cost

To summate the weighted average cost, carve up the total cost of goods purchased by the number of units bachelor for sale. To find the cost of goods available for auction, you'll need the full corporeality of outset inventory and recent purchases. The final calculation will provide a weighted average value for every particular available for sale.

Inventory weighted average cost formula (WAC)

To hands calculate WAC, use the simple formula as followed:

Cost of appurtenances available for sale / Full number of units in inventory

Weighted average cost adding instance

Computing the weighted boilerplate price might seem complicated at first, just it'southward simple once you get the hang of it. Here'south an example of how to calculate WAC:

Transactions for July	Quantity	Cost per unit	Total cost
Beginning inventory (July 1)	100	$two.50	$250
July 6	300	$2.75	$825
July 15	200	$3.00	$600
July 20	500	$ii.fifty	$1,250
Catastrophe inventory (July 31)	1,100 units	$two.65 (boilerplate)	$2,925

The total price of the inventory purchased is $2,925. The full number of units in inventory is 1,100. To calculate the WAC, separate $2,925 with 1,100 to obtain the average weighted price per unit of measurement, which is $2.65.

Comparing WAC to other common inventory valuation methods

Weighted average cost is a slap-up method to decide the value of your current inventory, but it doesn't necessarily mean information technology's the right method for your business organization. It's important to cull a method that y'all will apply consistently throughout the year. To brand certain y'all're using the right method that makes the about sense for your business, it's recommended that you weigh the pros and cons of each. If you switch methods earlier the next tax flow, information technology will result in major discrepancies.

Before y'all choose weighted average cost as your method of choice, be sure to familiarize yourself with the three additional types of inventory valuation methods below and empathise how they compare to the WAC formula.

FIFO (beginning-in, offset-out)

The FIFO method assumes that the inventory produced commencement will exist the first unit(s) to be sold and fulfilled. This method is best for perishables, or products that take a shorter shelf life or become obsolete. The downfall of this method is that if product costs significantly increase and your accountant is using value amounts from months ago, information technology can negatively impact profits or be misrepresented on an income statement.

LIFO (last-in, last-out)

The LIFO method records the well-nigh recently purchased products in the inventory as sold showtime, and the lower cost of older products will exist reported as inventory. During times of inflation, LIFO results in higher COGS and a lower balance of remaining inventory.

Specific identification method

The specific identification method provides the most accurate unit cost since information technology tracks every single item in stock individually from the fourth dimension it arrives to when it is sold. This is a mutual method for modest businesses and startups that can keep up with tracking every particular in inventory, but it's not a realistic approach for large businesses.

WAC

Compared to the other common inventory valuation methods, WAC is the ideal method for direct-to-consumer brands that take a high volume of inventory with items that are similar in price. For case, if you sell different scents of perfumes in the same size bottle, you might have several unique SKUs , but the value of each item is the same.

What are the advantages of the inventory weighted average method?

The inventory weighted average method is ane of the most common inventory valuation methods because of the many benefits that it offers, such as fourth dimension savings and consistency. Here are some of the advantages of using WAC in your overall inventory management procedure.

one. Easily track inventory value

Keeping up with inventory counts is one affair, let lonely tracking the costs information technology takes to purchase and store inventory. Different FIFO and LIFO that use a range of costs, the WAC method uses a blended average, making it easier to calculate and track inventory value.

"We have access to live inventory management, knowing exactly how many units we have in each ShipBob fulfillment center. It not simply helps with our overall process in managing and making sure our inventory levels are balanced but also for tax purposes at the end of the year. ShipBob made that entire process very simplified for our accountants and us."

Matt Dryfhout, Founder & CEO of BAKblade

2. Less paperwork for y'all

The WAC method requires a unmarried cost calculation to determine the average value of all items in stock. Since every item is valued at the same amount, in that location is no need to maintain detailed inventory purchasing records, which means less paperwork to keep track of.

3. Cut overall costs

The cost of managing your inventory can cutting into profits if you don't accept the fourth dimension to optimize the process. Instead of counting up each sellable unit so adding up the value of each product, the WAC formula provides a time-saving culling to calculate current inventory value, which helps you save money in the long run.

Other ways to simplify your procedure and reduce the costs associated with managing inventory are to use inventory management software and/or partner with a third-party logistics (3PL) visitor that provides inventory management tools, ecommerce warehousing , and real-time inventory reports . By optimizing your inventory management process and reorder quantity , you can reduce human being fault, spend less on labor, and salve on inventory carrying costs .

"I felt like I couldn't abound until I moved to ShipBob. Our onetime 3PL was slowing us downwardly. Now I am encouraged to sell more than with them. My CPA even said to me, 'thank god you switched to ShipBob. ShipBob provides me clarity and insight to assist me make business decisions when I need information technology, along with responsive customer support."

Courtney Lee, founder of Prymal

How outsourcing inventory management allows you lot to scale

Inventory management and lodge fulfillment go more than complicated equally ecommerce businesses grow. Without finding ways to optimize the supply concatenation and consistently track inventory and its value, it tin can be a challenge to scale.

Outsourcing fulfillment to a 3PL like ShipBob that offers inventory direction services, analytics, and engineering can assistance you scale faster. By partnering with ShipBob, you tin focus your time on expanding your business organization and improving the customer experience, while nosotros have care of fulfillment and inventory management tasks for you.

"Having confidence in scaling fulfillment is hypercritical for us. With ShipBob, we find comfort in knowing nosotros can scale and have orders fulfilled in a quick manner."

Tim Fink, co-founder of EnduroSport

Conclusion

Consistency is key when information technology comes to managing inventory levels and can assist make the process of filing taxes and comparing financials twelvemonth over year much easier.

If y'all're selling multiple SKUs of like products, the WAC method is a slap-up fashion to easily determine inventory value and maintain accurate fiscal statements. Past using the inventory weighted average cost method, you can track the value of inventory year over yr for proper inventory bookkeeping while saving time doing so. Simply there's a lot more than that goes into inventory management than keeping tracking of value.

ShipBob offers a full suite of fulfillment services with congenital-in inventory direction tools, including need forecasting , club management , and data and analytics . You tin can avert the headaches associated with wearisome inventory management tasks by partnering upwardly with ShipBob. To learn more about how ShipBob can aid your business calibration, click the button beneath for pricing and more information.