When selling a product, the merchant must have a good inventory method to take stock of what exists and avoid unfinished orders. This is essential in any company, since it guarantees the fulfillment of the needs of the clients, and the cost of selling an article. The weighted average method will allow the correct registration control to be carried out. This is because it is one of the most used inventory valuation methods.
When selling a product, the merchant must have a good inventory method to take stock of what exists and avoid unfinished orders. This is essential in any company.. Since it guarantees the fulfillment of the needs of the clients, cookies, Stocks and the cost of sale of an article, economy or goods and its accounting.
The weighted average method will allow the correct registration control to be carried out. This is because it is one of the most used inventory valuation methods together with Microsoft Excel. In this article we will give you all the information such as its advantages and disadvantages.
WEIGHTED AVERAGE METHOD: Characteristics, advantages and disadvantages of using it
Index( )
- What is the weighted average method?
- Characteristics of the weighted average method
- Sum all existing goods
- Results in an average cost of sale
- Improve inventory organization
- Facilitates the calculation of exact and fair prices
- Advantages and disadvantages of the weighted average method
- It is adjusted according to the inflation indices that arise
- Adapts to any type of product
- Variable price growth is not short-term
- It does not have a detailed report of incoming and outgoing merchandise
- Affects beginning inventory
- Generates delay in costs
What is the weighted average method?
Within an organizational company, accounting and money management is everything. The characteristics, advantages and disadvantages that they possess are several. However, the Weighted Average is one of the virtues in order to get the cost and price of the goods that are awarded.
This method is used in the case of carrying out a small evaluation in the inventory. Taking into account the Cookies and Stock to get the cost of the goods and the economy of the products sold. Microsoft Excel is used for this for more precise results .
- What exactly is the weighted average method?
Each time a purchase or order is made at different times, it usually has a different price. Therefore, for the sale of a product, the acquisition cost must be calculated. To determine the average cost of units purchased. This is achieved with the weighted average price (PPP), which evaluates the goods in stock and the costs of goods sold.
Characteristics of the weighted average method
In times without inflation, the weighted average method gives the easiest result for costing. Well, the sale price is one. Being the ideal for industries, since it helps to generate a good price for their products and exact control of the warehouse. In addition to this, the weighted average method has other characteristics such as the following:
Sum all existing goods
What the method does is determine a more balanced moving average of the cost of inventory units for sale . Then, all the values of the existing goods and the values of the new purchases must be added. To divide it by the total units in inventory. This is one of its most notable features and advantages.
Results in an average cost of sale
The result obtained shows a weighted average sales cost to obtain considerable profits based on the investment cost . Such features and benefits, because it represents the middle ground of what was paid to build the inventory. So, the organizational structure of a company will take better control of the cost of selling items to the public, economy and cookies, based on Microsoft Excel.
Improve inventory organization
Being related to costs, the weighted average method does not keep track of physical inventory or assets, but it does improve the organization of them. Due to the determination of the cost of a sale , it makes correct decisions to improve the financial situation and, in addition, calculate the existing and the new.
Facilitates the calculation of exact and fair prices
In estimating the costs of goods sold, the business will determine how to allocate products between inventory and cost of sales related to the accounting results obtained. That is why it is recommended to keep the billing system up to date. Purchase-sale and inventory in Microsoft Excel graphs, to better calculate the exact and fair prices of the weighted average.
Advantages and disadvantages of the weighted average method
Without a doubt, this method is one of the easiest and most used in companies, however, it has advantages and disadvantages. Which are important to clarify, in order to determine the effectiveness and importance of calculating inventory costs through the weighted average or moving average.
It is adjusted according to the inflation indices that arise
When there is inflation, that is, when the prices of items go up or down, a reasonable profit is still shown. Since, the weighted average method adjusts the old costs of the products in the inventory, with the new costs acquired for the stock.
Adapts to any type of product
In general, agricultural industries, mining and any production company use this method of valuation in their inventories. Such that, the method adapts to any industry or company, with any type of product. In part, this is because it generates a good selling price and is a simple technique to apply.
Variable price growth is not short-term
When an item is sold from inventory, the merchant must agree to a cost to repurchase the merchandise. What is not a disadvantage when inflation does not influence and the products are kept at a price. But in reality each purchase has a different price. Even so, the slight growth of the prices applied with this method does not generate short-term price variations with its advantages.
It does not have a detailed report of incoming and outgoing merchandise
If you want to keep a good control of the value of the inventory flow and keep the production warehouses up to date. It will not be possible with this system, it is a great disadvantage.
Because this method does not allow detailed control of the existing incoming merchandise or the existing outgoing merchandise. However, an accounting information system will give you a greater view of what is happening from the accounting point of view (income, costs, expenses) in the company.
Affects beginning inventory
The biggest disadvantage of using this valuation method is that you keep older product purchases in stock and purchase new purchases. These, when done under inflationary environments . They will bear a higher tax burden according to international accounting standards, thus affecting the initial inventory.
Generates delay in costs
Actual expenses cannot be explicitly allocated to items sold, so at the accounting level, future tax benefits are minimal. Generating a delay when the purchase costs plus the initial costs are related to the final costs. Not allowing a correct linking of costs and income , leaving a final inventory valued or even obsolete in some cases.
Characteristics of the Weighted Average Method
1. Consideration of Different Factors
One of the main characteristics of the weighted average method is its ability to consider different factors with varying degrees of importance. By assigning appropriate weights to each factor, you can ensure that the final average reflects the relative significance of each factor. This flexibility allows decision-makers to prioritize certain factors over others based on their importance.
2. Simplicity and Efficiency
Another noteworthy characteristic of the weighted average method is its simplicity and efficiency. The calculation involves straightforward multiplication and addition, making it easy to understand and implement. Moreover, the method ensures that all the available data points are taken into account, providing a comprehensive and accurate average value.
3. Flexibility in Decision-Making
The weighted average method offers a high level of flexibility in decision-making. By assigning different weights to each data point, you can easily adapt the method to cater to specific requirements or circumstances. This flexibility allows decision-makers to adjust the influence of each factor based on their unique needs and preferences.
4. Effective in Handling Skewed Data
Skewed data refers to a dataset where the distribution of values is not symmetrical. The weighted average method excels in handling such data by accounting for the varying weights assigned to each value. By giving more importance to certain data points, the method can produce a more accurate average that appropriately represents the dataset’s characteristics.
5. Useful in Complex Evaluation Processes
The weighted average method is particularly useful in complex evaluation processes where multiple factors need to be considered. Whether it’s assessing the performance of employees, evaluating investment opportunities, or analyzing customer feedback, this method can provide a comprehensive and reliable average that helps in making well-informed decisions.
Conclusion
The weighted average method has several characteristics that make it a valuable tool in decision-making processes. From considering different factors with varying degrees of importance to its simplicity, efficiency, and flexibility, this method offers numerous advantages. Whether you’re a business professional, an analyst, or a researcher, understanding and utilizing the weighted average method can enhance your ability to make informed decisions based on accurate and comprehensive averages.