Weighted Average Cost (WAC) inventory method
Weighted average cost (WAC) is an inventory valuation method that blends the cost of all units on hand into one average, recalculated with each purchase, and charges that average to COGS as units sell. Where FIFO tracks cost layers, WAC smooths them. It suits sellers with many SKUs, frequent small receivings, or commingled stock where matching a sale to a specific purchase batch is impractical.
The mechanics are simple. You hold 1,000 units carried at $8.00, then receive 500 more at a landed cost of $11.00. New average: (1,000 × $8 + 500 × $11) ÷ 1,500 = $9.00. Every unit sold from that point charges $9.00 to COGS until the next receiving shifts the average again. No layers to track, no question of which batch shipped.
The cost weighted average formula
Weighted average unit cost = total cost of units available ÷ total units available. "Weighted" is the key word: a batch of 1,000 units counts ten times more than a batch of 100, so the average leans toward the big receiving rather than splitting the difference between two prices. A plain average of $8 and $11 would be $9.50; the weighted answer above is $9.00 because two-thirds of the units came in at $8.
Perpetual vs periodic averaging
Under a perpetual system the average updates at every receiving, which is the moving average most inventory software and Xero use. Under a periodic system one average is computed for the whole month from beginning inventory plus all purchases, then applied to everything sold. The two give slightly different COGS in a month with both purchases and sales; perpetual is more precise and more common in ecommerce because the tools do the math.
WAC vs FIFO, side by side
Same purchases, 1,000 at $8 and 500 at $11, then 1,200 units sold. FIFO COGS: 1,000 × $8 + 200 × $11 = $10,200, leaving 300 units at $11, or $3,300. WAC COGS: 1,200 × $9 = $10,800, leaving 300 units at $9, or $2,700. FIFO shows $600 more profit this month and a higher inventory value; WAC pushes that $600 into a future period. Over the life of the stock, both expense $13,500. Only the timing differs, and timing is what monthly margins and this year's tax bill are built on.
The trade-off is resolution
WAC mutes cost spikes, which keeps margins stable on paper but can delay your noticing that the latest container came in 25% more expensive. For a 40-SKU brand reordering monthly, that smoothing is usually a feature; for a 3-SKU brand where one tariff change moves everything, FIFO's sharper signal may serve better. Either way the method must be applied consistently, and the average must be built on true landed cost, not invoice price. We set the method and maintain it as part of monthly bookkeeping.
Common questions
Is weighted average allowed for US tax? Yes. It's an accepted method under IRS rules and GAAP, with no special election, though changing methods later needs Form 3115.
Which software uses it by default? Xero and most ERP inventory modules. QuickBooks Online's built-in inventory is FIFO. If your books and your inventory tool assume different methods, the two will never agree, so settle that during setup.
Where this shows up in our work
This isn’t textbook material for us; it’s the day-to-day of keeping seller books right. See how we handle it in practice:
Monthly Ecommerce Bookkeeping →