Weighted-Average Cost Flow Assumption

In this method of weighted average cost flow assumptions, the periodic inventory method is used, which is employed to compute the value of the inventory in addition to the costs of the goods sold. This cost that is the average of the total cost is based on the costs of goods available for sale in the inventory for the entire year. This average cost is then applied to the units that have been sold and the units that are still in the inventory.

Cost flow assumptions are a necessary tool for the company in determining the costs of goods sold and the ending inventory at the end of the fiscal year. In this method, the use of word assumption state that the companies make these assumptions and it does not represent the actual movement of the inventory. The company assumes which of the goods are sold and which of them is still the part of the inventory. This practice is used only for the financial reporting and taxation purposes, and it is not necessary that it agrees to the actual inventory present in the stock. The only requirement of this method is that the costs of the goods sold in the period and the costs of the goods reaming at the end of the current period match the costs of the actual movement of inventory.

Weighted average method of cost flow assumptions is the direct opposite of the specific identification method of cost flow assumptions. This method states that it is assumed that all the goods of certain type can be interchanged. The only difference in these goods is their purchase price. These price differences are not caused due to internal factors. These differences are due to change of external factors, such as political change or inflation, which cause the prices to change at a national level. In this method, all the costs are added by the total number of the units that are purchased. This number of units also divides these costs. At the end of the fiscal period, the quantity of units is multiplied by the average price per unit to work out the costs of goods sold.