Weighted average costWeighted Average Cost (WAC)

Weighted average cost (WAC) — sometimes just called the "average cost method" — is an inventory accounting method that values every unit at the running average cost of all the stock currently on hand.

When you receive new stock at a different price, the system recalculates the average across all units. When you sell, COGS is booked at that average — not at the price of any specific batch.

It's an alternative to FIFO, and the most pragmatic choice when individual lot tracking isn't practical.

How weighted average cost works

The formula is straightforward:

WAC = (Total cost of all units on hand) / (Total units on hand)

Recalculated every time new stock is received. Worked example:

• Day 1: Buy 100 units @ £10 → WAC = £10/unit
• Day 15: Buy 100 units @ £12 → Total cost £2,200 / 200 units → WAC = £11/unit
• Day 20: Sell 50 units → COGS booked at £11 × 50 = £550. Stock now 150 units at £11 = £1,650.
• Day 30: Buy 100 units @ £14 → Total £3,050 / 250 units → WAC = £12.20/unit
• Day 35: Sell 100 units → COGS at £12.20 × 100 = £1,220.

Notice that COGS doesn't reflect any specific purchase batch. Every sold unit is costed at the running average, smoothing out price fluctuations.

WAC vs FIFO — when to choose which

Both are permitted under UK GAAP and IFRS. The choice comes down to operational fit:

Use WAC when:

• Individual lot tracking isn't practical (commodities, fungible goods, bulk materials)
• Price fluctuations are frequent and you want stable margins on the P&L
• The cost of building lot-level visibility outweighs the analytical benefit

Use FIFO when:

• You can track stock by batch (most consumer brands can)
• You want margins to reflect the actual cost of what shipped
• Physical rotation matters (perishables, fashion seasonality)

For most scaling consumer brands, FIFO is the default. WAC is more common in commodities, food ingredients, raw materials, and any operation where every unit of a SKU is genuinely interchangeable.

What WAC is good at

Smoothing volatility. Spot-price spikes don't show up as margin shocks on the P&L. A purchase of expensive stock affects the average gradually rather than dramatically.

Simplicity at scale. No lot tracking, no FIFO/FEFO discipline, no batch-level COGS calculations. The system just averages.

Audit-friendly. Auditors find WAC easier to verify because there's no question of which lot was sold first.

What WAC is bad at

Disguising margin reality. When the price of a specific shipment is significantly different from the average, the gross margin reported under WAC bears little relation to the actual margin on those units. You can't tell from the P&L which batches were profitable.

Masking dead stock. Slow-moving stock at high WAC drags the average up — newer arrivals at lower prices don't surface as a separate cost layer. Harder to spot the problem.

Misaligning physical and accounting flow. If you physically rotate stock FIFO (oldest first) but cost it at WAC, the unit shipped doesn't match the cost booked. Most operations accept this, but the gap creates margin reporting noise.

Common WAC mistakes

• Switching method mid-period. Pick WAC, FIFO, or weighted average per SKU and stay there. Method changes mid-year produce COGS that won't reconcile.
• Forgetting to recalculate after returns. A return back into stock doesn't reset the WAC unless you tell the system to. Otherwise the average is wrong.
• Using WAC across the whole range when FIFO would suit some categories. It's reasonable to use WAC for commodity-style ingredients and FIFO for finished goods.
• Ignoring WAC drift after a deep-discount purchase. A clearance batch at half-price drops the WAC dramatically. Future sales at full price show inflated margins until the cheap stock is exhausted. Predict and explain it.