Inventory and stock
Moving average cost: formula and worked example
Definition
Moving average cost: Moving average cost values stock at the average cost of all units on hand, recalculated every time new stock arrives at a different price.
Also called: weighted average cost, moving weighted average, average cost method, WAC
How moving average cost works
With moving average cost, every unit of a product in stock carries the same cost: the average of what you paid for all of them. Each time a delivery arrives, the average is worked out again: new average = (units on hand × current average + units received × their cost) ÷ (units on hand + units received).
Sales, transfers and write-offs leave at the current average and do not change it; only receipts move it. That is why it is called moving. A periodic weighted average does the same sum once, at the end of a month or year, over everything bought in that period. Moving average suits businesses that buy the same goods often at changing prices, such as spices, grains and oil.
Weighted average in Indian accounting standards
AS 2 and Ind AS 2 allow the weighted average cost formula, alongside FIFO, for goods that are ordinarily interchangeable, such as sacks of the same spice or boxes of the same pen. The cost should include what it took to bring the goods to their present location and condition, such as freight, but not taxes you recover, such as GST claimed as input credit. Use the same formula for similar goods every year, and ask your accountant which one your books follow.
Common mistakes
Averages hide errors, so these are worth checking whenever the cost looks odd.
- Including GST you claim as input tax credit, which overstates cost.
- Leaving out freight and loading, which understates it.
- Averaging different products together, such as 500 g and 1 kg packs.
- Entering opening stock with no cost, which pulls the average down.
- Treating the latest purchase price as if it were the average.
Worked example
Moving average cost of turmeric for a masala maker
A masala maker holds 200 kg of turmeric at an average of ₹150 a kg, worth ₹30,000. It receives 300 kg at ₹170, worth ₹51,000. New average = (₹30,000 + ₹51,000) ÷ 500 kg = ₹162 a kg. It then uses 250 kg in production, at a cost of 250 × ₹162 = ₹40,500, leaving 250 kg worth ₹40,500. A further 250 kg arrives at ₹160 a kg: (₹40,500 + ₹40,000) ÷ 500 kg = ₹161 a kg.
In managemate
managemate keeps a moving average cost for each lot, per stock unit and before GST. When more stock arrives into an existing lot, such as the undated lot of a product received without lot numbers, its cost blends in by quantity, and stock leaving a lot goes at that lot's average. Separate lots keep separate costs, so goods sold or used take the cost of the lots they actually left. A product's average cost is the weighted average of its costed lots in stock, falling back to its catalogue purchase price. Purchases come in at landed cost, production output at the cost of the materials actually used, and goods returned to a supplier leave at the cost they came in at.
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