Weighted Average Purchase Price Method (WAC)
Overview of the Method
The Weighted Average Cost (WAC) method is used to calculate the value of inventory consumption or sales. The average price is calculated as:
WAC = Total Inventory Value / Quantity in Inventory
Each new purchase recalculates the average cost, which is then used for valuing withdrawals. The method should be applied continuously until the entire inventory batch is sold for accurate representation.
Why Does the Purchase Price Fluctuate?
Purchase prices vary because each new purchase updates the average cost. Significant fluctuations occur when:
- Deliveries are recorded late
- Inventory goes negative (more sold than recorded in stock)
This can result in:
- Prices much higher or lower than expected
- Even negative values, which can be confusing
Practical Examples
1. Normal State:
- Timely entries
- No negative inventory
- Stable prices aligned with real purchase prices
2. 'Strange' Prices:
- Delayed entries
- Price drops from 13.33 kn to 4.67 kn
- Despite variation, total purchase value equals total sales value (e.g., 178 kn)
3. 'Extremely Strange' Prices:
- Severe delay, significant negative inventory
- Price becomes -240.04 kn per unit
- Still, total purchase = total sales value
Conclusions and Recommendations
- Prevent negative inventory: essential for accurate stock pricing
- Ensure timely data entry: record every delivery promptly
- Why WAC is commonly used locally:
- Easy to program
- Well supported by software
- Widely understood and accepted
- FIFO and LIFO rarely used
References
- Belak, V. – Accounting and Inventory Audit, Faber & Zgombić Plus
- Inventory and Warehouse Management, RRIFplus, Zagreb
- Organization and Application of Accounting, Faculty of Economics, Osijek