What Is Weighted Average Cost (WAC) Inventory Valuation?

How weighted average cost works

Under WAC, every unit of a product is treated as the same, whichever lot it came from. When new goods arrive, the system adds their value to the value already held and divides by the new total quantity. The formula is: new average cost = (existing quantity × existing average cost + received quantity × received cost) ÷ (existing quantity + received quantity). Goods leaving stock do not change the average; they simply leave at the current average.

A worked example

Suppose a dealer holds 100 units of a product valued at ₹50 each, a total of ₹5,000, and then receives 50 more units at ₹62 each, worth ₹3,100. Stock is now 150 units with a total value of ₹8,100, so the average cost is ₹8,100 ÷ 150 = ₹54. If 60 units are then sold, they leave at ₹54 each, a cost of ₹3,240, and the remaining 90 units are still valued at ₹54, a total of ₹4,860. A later purchase at a different price would move the average again.

Why traders use it

Traders buy the same product repeatedly at changing prices, and the goods are interchangeable, so tracking each lot separately adds effort without much meaning. WAC gives one stable figure per product, which makes margins easier to read and stock valuation easier to explain. Other methods, such as first-in-first-out, are also in common use, and which method suits your books and tax position is a question for your CA.

How TradeFlow values stock

TradeFlow keeps one weighted-average cost per product across the company, calculated from a running total of quantity and value. It is updated as stock moves.

• Goods receipts add stock at the rate on the purchase order line, and update the average
• Delivery challans take stock out at the current average, which the sale does not change
• Stock transfers between warehouses move stock at the current average, so total value is unchanged
• Damage write-offs and cycle-count shortages leave at the current average
• A credit note marked as a stock return puts stock back at the current average, not at the original sale cost

What the valuation report shows

The stock valuation view in TradeFlow lists each product with its quantity on hand, the quantity that has a cost, the quantity that does not, the total value, the weighted-average cost and a valuation status of valued, partially valued or valuation required. That last column matters, because it tells you where the value is incomplete instead of quietly showing a wrong number.

Stock that has no cost yet

Not every stock movement carries a cost. In TradeFlow, a manual stock adjustment and surplus stock found in a cycle count are recorded without a cost, so that quantity is shown as unvalued until a cost is entered. Cancelling a goods receipt also reverses the stock without a cost. If you see products marked partially valued or valuation required, review those entries rather than ignoring them.

Practical habits that keep valuation reliable

A few habits make the figures dependable.

• Keep purchase order rates accurate, because they set the cost of received goods
• Record opening stock with its cost when you start using the system
• Prefer receipts and transfers over manual adjustments for anything that has a cost
• Review products marked partially valued or valuation required each month
• Compare the valuation with a physical count from time to time

For dealers in materials with frequent price changes

Dealers in building materials, hardware and similar goods see prices move often, which is where a single average helps. It smooths short-term swings so that a run of expensive or cheap purchases does not distort the margin on the next sale. The trade-off is that the average lags the latest purchase price, so revisit your selling rates when replacement cost moves sharply.

Where TradeFlow fits

TradeFlow is an ERP for Indian traders, wholesalers, distributors and dealers, and includes weighted-average stock valuation across purchasing, delivery and warehouse movements. This article describes stock valuation in the ERP; how it appears in your accounts and tax filings should be confirmed with your CA. To see how it connects with purchasing and sales, read the guides on purchase-to-payment and order-to-cash.

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