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Weighted Average Method

The weighted average method of inventory valuation is based on the assumption that all costs can be aggregated and that the cost to be assigned to cost of goods sold and ending inventory should be the weighted average of the cost of the units held for the accounting period. The weighted average unit cost is calculated by dividing the total cost (i.e., Quantity x cost per unit) of similar units cost is calculated by dividing the total sale during the given period by the related number of units (aggregate quantity) of the commodity. This is the procedure under periodic method.

Moving average cost:

When a perpetual inventory system is used, the weighted average cannot be applied because weighted average unit cost cannot be calculated until the end of the accounting period. To overcome this difficulty, a moving weighted average unit is used because it provides a new unit cost after each purchase. The procedure is: prices for units in the beginning inventory (i.e., opening stock) and in each purchase are multiplied (weighted) by the number of units in the beginning inventory and in each purchases and are then averaged (divided by total number of units) to find out the weighted average cost per unit. Thus when goods are sold or issued, the moving average unit cost existing at that time is used. It may be added that a new weighted average unit cost is calculated after each purchase at a different price and this unit cost figure is used to price all issue of goods until the next purchase is made.

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