Weighted average price

What is the weighted average price?

The weighted average price, also known as the weighted average price, is a inventory valuation accounting procedure where the subsequent weighted entries are added, according to their quantities, the average value of merchandise stocks at the beginning of a year.

This serves to carry out a control in planning Y organization of the inventories of a company and to obtain an average cost, regardless of the date of entry or exit of the product.

How to calculate the weighted average price?

The formula to calculate the PMP is the following:

Formula to calculate the weighted average price.

Where:

• ∑ is the sum.
• Pt is the total price, that is, the entered price times the entered quantity.
• Q is the amount entered.

For example, to calculate the weighted average price of an income of 3 goods, the formula would look like: PMP = (P₁ x Q₁ + P₂ x Q₂ + P₃ x Q₃) / (Q₁ + Q₂ + Q₃).

Advantages and disadvantages of the weighted average price

Advantage

The advantages of the weighted average price are as follows:

• It is very simple and easy to apply.
• You do not need to keep track of the items being sold and when the sale occurs, such as FIFO and LIFO methods.
• Use the same inventory cost for all units.

Disadvantages

The disadvantages of the weighted average price are as follows:

• It does not match any value in the inventory flow.
• At the accounting level, future tax benefits are minimal.
• Actual expenses cannot be explicitly assigned to items sold.
• It is not very reliable in periods of time where there is no price stability.

Weighted average price example

Here is an example of a weighted average price:

• In March of this year, the company Electrodomesticos SA acquires 150 units at a unit cost of $ 1,000, which gives a total value of $ 150,000.
• In mid-June, he made a new purchase for 50 units, at a cost of $ 1,200 each ($ 60,000).

In balance (see table), the balance of the first acquisition is added to the units acquired, to then calculate the PMP. In this way, it is obtained that the PMP is (150,000 + 60,000) / (150 + 50) = $ 1,050.

• In August of the same year, 80 units were sold at the PMP of $ 1,050 each.
• In the last month of the year a sale for 45 units is closed, also at $ 1,050.

Thus, the ending inventory balance is $ 78,750. The weighted average price is 75 units at $ 1,050.