Hi everyone. So we're continuing on with our discussion of Inventory Valuation,
and this video we're going to be talking about the weighted average cost method.
Sometimes called the moving cost method. So we're going to jump right in with an
example. Here I've got a spreadsheet set up for us.
And again this is called the weighted average, or the average cost method,
because in each each time we make a purchase, we're going to need to
calculate a new average cost for what we have in the ending inventory. So we can
see that with this spreadsheet here. So again this is the same spreadsheet we've
been using for FIFO and LIFO in previous videos. So in July the 1st, we had
beginning inventory of 1 item that cost us $40. Well the average cost
of that 1 item is would be $40. On July the 5th, we purchase 6 more items, again
costs are rising, so f$45 each for a total cost of $270. So if you
scroll on over now on July the 5th to our ending inventory, we now have 7
items, from 1 from our beginning and 6 with the purchase that cost us a
total of $310. That's $40 for the one item from
beginning, and $270 for the 6 we just purchased. So
the way we would get an average cost of each one of those items in our ending
inventory is to take the total cost we currently have in ending inventory of
$310, divide that by 7 items, and that gives us a weighted average cost of
$44.29. So now when we go and sell those or sell
some of those items on July the 15th, we're going to sell 4 items.
We're going to cost them at that average cost of $44.29
for a total of $177. That's
what we will record as our cost of goods sold in our journal entry. And now we
have 3 items left in ending inventory at that $44.29
for a total of $133. Notice I didn't calculate a new
average, there's no need to , when I make a sale. Only when we make up
purchase do we need to recalculate a new average cost. So then on July the 26th we
purchased 7 more items, again cost are rising, so there are $50 a
piece now for a total of $350. Well we had 3 items and now we've added
7 more, so we've got a total of ten items that cost us a total of $483.
That's $133 from 3 items previously, then we added 7 items at
$50 @ $350, so $483. To get an average cost of each one of those units
we're going to take $483 divide that by our 10 units, we get an average
cost of $48.30. Then we make another sale on the 31st of 8 items,
and we're going to use our current average cost of $48.30
to cost those items. Remember this does not reflect revenues, this is only cost.
In this chart so the cost of that sale would be $386.
That leaves us two items in the ending inventory at $48.30
each for a total of $97 our ending
inventory total cost of goods sold for this period. We sold 12 items @
$563 and our total purchases of 13 items @ $620.
So keep this in mind if you're doing all 3
methods the FIFO, LIFO, and weighted average methods, LIFO is going to give
you the greatest cost of goods sold, and we discussed why that is in a previous
video about LIFO. FIFO will give you the least cost of goods sold, and your
weighted average method should be somewhere right in between those two. So
now I want you to try an example. Prepare Gutters Paradise inventory record, so
similar to what we just little spreadsheet we just set up, on an average
cost basis round your average cost per unit to the nearest cent, so two decimal
places, and all other amounts to the nearest dollar. Then identify the cost of
ending inventory and cost of goods sold for the month. The sales price of each
item is a $140 and all sales are on account. Now
we're setting up an inventory cost sheet. So the sales price are so
revenue is really not important in this story here. When this becomes important
is when we're calculating our gross profit or journalizing our entries, then
we would need to know what we actually sold these things for. But if we're
simply called calculating cost of goods sold and ending inventory we do not
really need sales revenue. So that's not there to trick you, but you should know
that it's not needed in calculating cost of goods sold and your ending inventory.
So press pause on your player. Figure out the cost of your ending inventory, and
your cost of goods sold, and your purchases and that little spreadsheet
that we've been looking at, and come back and we'll talk about it together. Okay so
what you should have found you should have found an ending inventory of 6
items at $480, cost of goods sold you sold 8 items at a total of $630,
and your purchases, you purchased 10 items at
$810. D on't forget if you enjoyed the video, give it
a thumbs up and questions and comments are always welcome.