Weighted Average Cost Method
An inventory valuation method that assigns the same average cost per unit to all goods available for sale, smoothing out price fluctuations.
What is AVCO / WAC?
The weighted average cost method (also called AVCO or WAC) calculates the cost of inventory by dividing the total cost of goods available for sale by the total number of units available. This average cost is then applied uniformly to both cost of goods sold (COGS) and ending inventory. Unlike FIFO (which assigns the cost of the oldest units to COGS) or LIFO (newest costs first), AVCO blends costs together, reducing the impact of price volatility on reported income. AVCO is permitted under both GAAP and IFRS, whereas LIFO is allowed under GAAP only. AVCO is particularly suitable for industries where individual units are indistinguishable — such as grain, fuel, or chemicals. It produces reported income and inventory values that fall between the FIFO and LIFO extremes during periods of rising prices.
Example
A hardware store buys 100 bolts at $1.00 each (January) and 200 more at $1.50 each (March). Total cost = $100 + $300 = $400 for 300 units. Weighted average cost = $400 ÷ 300 = $1.333 per bolt. If 180 bolts are sold, COGS = 180 × $1.333 = $240; ending inventory = 120 × $1.333 = $160.
Source: FASB ASC 330 — Inventory