# Inventory cost flow methods - weighted, moving average

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Under the weighted average accounting method all purchased items prices are summed and divided by total numbers of the acquired items. This method is used under the periodic inventory system.

Moving average inventory cost flow method

The moving average method calculates the weighted average cost of inventory after each sale. This is more detailed and updated data method which is used under the perpetual inventory system

To illustrate how Weighted Average and Moving Average methods work, let’s assume that an entity just started a business and doesn’t have any inventory at the beginning of a period yet, but purchased 100 units at \$16 per unit and 200 units at \$22 per unit. They sold 50 of those units after the first purchase and 160 more units after the second purchase during the period.

Under the periodic inventory system (Weighted Average Method) where the inventory levels should be computed each period (at least annually) the entity will get the following results:

 Date Inventory Items Unit cost Total cost 01/01 Beg. inventory 0 \$0 \$0 02/01 Purchase 100 \$16 \$1,600 03/01 Purchase 200 \$22 \$4,400 Cost of goods available for sale \$6,000 Total inventory 300 \$20* \$6,000 End. inventory 210 \$20 \$4,200 Cost of goods sold = \$1,800

* In order to calculate weighted average price per unit the total cost must be divided by total inventory units for the period. In the example \$6,000 was total goods available for sale from 300 units. Therefore, \$6,000 / 300 units = \$20 per unit.

Under the perpetual inventory system (Moving Average Method) where the inventory levels should be computed after each sale the entity will get the following results:

 Date Inventory Items Unit cost Total cost 01/01 Beg. inventory 0 \$0 \$0 02/01 Purchase 100 \$16 \$1,600 03/01 Purchase 200 \$22 \$4,400 Cost of goods available for sale \$6,000 Date Items bought Items sold Unit cost Total cost 01/01 0 0 \$0 \$0 02/01 100 0 \$16 \$1,600 50 \$16 (\$800) 03/01 200 \$22 \$4,400 160 \$20.8** (\$3,328) Cost of goods sold = \$4,128 03/01 End. inventory 90 \$20.8 \$1,872

** Moving average price per unit is found by multiplying the numbers of unsold items by their purchase price and numbers of newly purchased items by their cost then sum those numbers together to find out remaining cost of goods available for sale and divide that by remaining numbers of units which is still in inventory.

\$20.8 per unit = [(50 unsold units x \$16) + (200 purchased units x \$22)]/250 AFS units, where AFS stands for Available for Sale units.

Note that under Weighted Average (periodic inventory system) and Moving Average (perpetual inventory system) the amount of cost of goods sold are different and the amount of ending inventory are not the same as well. The cost of goods sold and ending inventory are lower under perpetual inventory system compare to periodic one. Therefore, it does matter whether to use Weighted Average (periodic) or Moving Average (perpetual) accounting methods depending on which one will benefit them the most. For example, periodic calculation typically is easier and faster while perpetual one is more detailed.

Weighted average inventory method compromises between FIFO and LIFO accounting methods. Even though the name applies for first in first out and last in first out, but in real life it does not work all the time that way. Many times how it is in fact and how it is according to accounting purposes may vary. For example, a store won’t make each customer to take exactly the first item they purchased as well as the last one if they use LIFO method. Therefore, weighted average may reflect the most accurate data that is in the company’s ending inventory for the period.