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Whether you run a small startup or a large commercial business, you need a suitable method for calculating your company’s inventory value. When you learn how to carry out an effective inventory valuation, you can increase your business’s overall profitability and use the calculation as handy collateral for loans.
Before we delve into the weighted average inventory costing method, consider these takeaways:
- Calculating your company’s inventory valuation allows you to see how much your business is worth and increases its profitability.
- The weighted average costing method comprises a simple equation: the cost of goods available for purchase divided by the total number of units available for sale in your company’s inventory at the end of an accounting cycle.
- The weighted average costing method is one of the easiest and most cost-effective methods of working out your company’s current worth.
The weighted average inventory costing method is one of the easiest ways to calculate your business’s value. By mastering this process, you’ll find you can get a better grip on your company’s finances and predict future market successes.
What Is an Inventory Valuation?
An inventory valuation is the financial amount linked to the products in your company’s inventory at the end of an accounting cycle or period. It’s a useful reflection of how much your inventory is worth at any one time. The inventory is likely your company’s largest current business asset.
There are several crucial reasons why you must know how much your company’s inventory is worth, such as:
- Knowing your inventory’s value allows you to modify the cost of goods and products you sell. For instance, if you register a particularly high valuation, you can lower the cost of sales and increase your overall profit.
- This type of valuation helps you determine your business’s profitability and reflect upon the total COGS (Cost of Goods Sold) in an accounting period.
- You can use this valuation as a backup in exchange for a business loan.
Calculating your inventory’s value can help you save money.
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There are a few ways to conduct an inventory valuation. The weighted average inventory costing method and its benefits can help your company make financial decisions more efficiently.
How Does the Weighted Average Inventory Costing Method Work?
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Working out the weighted average cost (WAC) is relatively straightforward. You need to determine the total financial cost of all the equipment or merchandise you plan to sell. To find this number, you’ll have to know the value of your beginning inventory and the number of recent sales your company has made. Your business’s beginning inventory is the book value of this inventory at the beginning of a reporting cycle.
Once you’ve found the total financial cost of the goods you’re planning to sell, you need to divide this number by the total number of products you plan to sell to customers. Your weighted average cost is the cost of goods available for purchase divided by the total number of units available for sale in your company’s inventory.
Imagine your company’s merchandise at the beginning of an accounting cycle (January 1st), and you have 100 poly drums available for sale in your inventory, each costing $5 each. The total cost of your inventory at this point is $500. Take a measurement on the 6th of January when there are 200 poly drums, each now priced at $5.50. That’s a total cost of $1,100. On January 17th, you have 300 poly drums, each priced at $4.50. Your total cost at this point is $1,350. On January 23rd, you’re down to 150 units, each at $5: that’s a total cost of $750.
January 31st marks the end of this accounting cycle. In order to figure out the financial worth of the inventory’s goods available for sale, you add up the total cost values recorded across the month: $500 + $1,100 + $1,350 + $750, which equals $3,700. The total number of poly drums available for sale is 100 + 200 + 300 + 150, which equals 750 units. Now the weighted average cost calculation becomes simple: $3,700 divided by 750 is 4.93. This number means your average cost per unit is $4.93.
What Are the Strengths of the Weighted Average Costing Method?
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Keeping inventory and accurate record-keeping are integral to mastering the art of warehouse organization. The more organized you are, the easier it is to track your merchandise. Besides utilizing hazmat lockers to store hazardous materials and make your warehouse floor more ergonomic and safe, consider integrating a warehouse management system (WMS). These software platforms can find inefficiencies in your production chain, minimize inventory mistakes and improve workflow.
Utilize a Hazmat Locker to Keep Your Warehouse Organized and Safe
An organized warehouse and a WMS combined with WAC can give you an accurate overview of your business’s valuation at a glance. The WAC method of calculating your inventory’s value has several key strengths.
The weighted average costing method uses an accurate average cost, making it one of the most straightforward ways to calculate inventory value. Like the LIFO and FIFO options, several other methods use a spectrum of different cost figures, which can be confusing.
The average costing strategy can save you time and money. You won’t have to track each unit’s price separately, and it requires less effort to make the final calculation than you’d have to exert when using any of the other methods.
Minimizes paperwork and research
You won’t need to find lots of paperwork that keeps you up-to-date with recent purchases and differing costs of units when you use the weighted average costing method. The other three main methods of calculating inventory valuation (LIFO, FIFO and specific identification method) require you to be more specific and thorough in your research. These approaches may be ideal for startups or small family-run businesses, but they’ll waste time and money for larger operations with greater and more varied inventories.
If you’re not sure which method to choose, explore the choice of inventory costing method of selected companies to see what inventory valuation strategies they use.
The Final Word
Performing an inventory valuation helps you to monitor and increase your company’s profitability. If you’re looking for an easy, efficient and effective way to figure out your business’s current worth, consider using the weighted average costing method. The WAC is straightforward and cost-effective, and you won’t have to worry about cutting into your company’s profits when you adopt this method.
