Under this method, the issue price is recalculated after each receipt of stocks taking into account both quantities and money value of the stocks received (perpetual weighted average). In this case stock used or unused is based on the average price per unit where the average price per unit is calculated as follows:
At times, the inventory valuation may be done only once; at the end of the period. In such a situation, the WAM formula will still be used but we shall regard that as periodic WAM valuation.
Advantages of the WAM method
Fluctuations in prices are smoothened out making it easier to use the data for decision making. This method is easier to administer than the LIFO and FIFO methods of stock valuation.
Disadvantages of the WAM method
The resulting issue price is rarely the actual price that was paid and it can run into several decimal places. Prices tend to lag a little behind the current market value where there is gradual inflation
Assume the following purchases were made in ABC Ltd Date of purchase Units purchased Price/unit
Determine the cost of units used by using and the value of the closing stocks by using FIFO,
LIFO and Weighted Average Methods.
Closing stock was valued at Shs.360,000 comprising 800 units @ Shs.400 and 200 units @ Shs.200.
The 900 units issued comprised of the first batch 800 units @ Shs. 400 Purchased on 3rd Jan and 200 units from the second batch purchased on 2nd Jan @ Shs.200. *** Price for the materials used is different.
Closing stock was valued at Shs.130,000 comprising 500 units @ Shs.100 and 400 units @ Shs.200.