Inventory glossary
What is Weighted average cost?
Weighted average cost is an inventory valuation method that calculates a single average cost per unit by dividing total inventory cost by total units on hand, recalculated each time new stock comes in.
Weighted average cost gives you one clear number for what each unit in stock actually cost, even when you bought the same product at different prices over time. This matters for pricing decisions and for knowing your real gross margin instead of guessing based on the most recent invoice.
Small store owners use it mainly for bookkeeping and tax reporting, since it feeds directly into cost of goods sold. If you buy the same SKU from a supplier whose prices shift from order to order, this method smooths that out so your margin reporting stays consistent rather than jumping around with every new purchase price.
Formula
Example
A store has 50 candles in stock bought at $4 each, for a total cost of $200. A new shipment of 50 candles arrives at $6 each, adding $300. Total cost is now $500 for 100 candles, so the new weighted average cost is $500 / 100 = $5.00 per candle. This $5.00 figure is used for cost of goods sold until the next purchase changes it again.
Common mistakes
- Forgetting to recalculate the average every time a new purchase comes in at a different price.
- Mixing up weighted average cost with FIFO or LIFO, which track cost layers separately instead of blending them.
- Using the wrong total units, for example forgetting to subtract units already sold before the new shipment arrived.
Weighted average cost and SteadyShelf
SteadyShelf does not handle inventory valuation or costing; it focuses on forecasting demand and generating purchase orders based on supplier lead times.
SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.
Related terms
Inventory valuation · Cost of goods sold · FIFO · LIFO · Gross margin
FAQ
Does weighted average cost change every time I sell a unit?
No. Weighted average cost blends your purchase prices into one number per unit. It does not predict sales or tell you when to reorder. It is used for valuing inventory and calculating cost of goods sold.
How is weighted average cost different from FIFO?
You add the new purchase to your existing inventory value, then divide by the new total units. This resets the average cost that applies to every unit going forward, old and new combined.
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