Inventory finance
Weighted Average Cost
By the Supply Chain Manager team · Updated October 16, 2026
Weighted average cost values every unit of a SKU at the average cost of all units held, recalculated as new stock is bought at different prices.
It smooths out price changes between purchases, so cost of goods sold sits between FIFO and LIFO when prices move. Many inventory and ERP systems use a moving average that updates on every receipt.
With a perpetual moving average, the average is recalculated each time stock is received. With a periodic weighted average, it is recalculated at the end of a period from all purchases in that period. Inventory systems usually use the moving version, because it keeps cost of goods sold current on every sale.
How to calculate weighted average cost
Average Cost = (Existing units × Existing average cost + New units × New unit cost) ÷ Total units
Weighted average cost example
Illustrative numbers: 100 units at $4 plus 100 units at $5 give an average cost of $4.50. Selling 150 units gives COGS of $675, and the remaining 50 are valued at $4.50 each.
Why weighted average cost matters for distributors
Average cost is simple and stable, which makes margin reporting easier to read. It is also a common baseline for spotting price variance on new purchase orders.
Common weighted average cost mistakes
- Leaving freight and duties out, so the average understates true cost.
- Letting stock adjustments at zero cost distort the average.
Examples on this page use made-up round numbers to show the calculation. They are not benchmarks or results from real businesses.