Weighted average cost
AccountingThe IFRS permitted inventory convention that blends every purchase into a single average cost per unit.
Also written: AVCO, weighted average costing, average cost method
Weighted average cost pools the cost of everything available for sale in the period and divides by the units, then charges that average to both cost of sales and closing inventory. IAS 2 permits it alongside FIFO and, for interchangeable goods, those two are the only options an IFRS reporter has.
Its result always sits between FIFO and LIFO, because an average of the layers cannot be more extreme than the layers themselves. That makes it the smoothing choice: profit is less sensitive to a spike in input costs than under FIFO and the balance sheet is less stale than under LIFO.
It is common in businesses where inventory genuinely is a pool rather than a set of identifiable batches, chemicals, fuels, commodities and bulk components being the obvious cases, and it is also the practical choice when a perpetual system would make layer tracking expensive.
The comparability point matters within a European peer set as well as across the Atlantic. Two IFRS reporters can use different conventions, so a gross margin gap between them is not necessarily an operating gap. It is a smaller distortion than the LIFO one but it is not nothing, and IAS 2 requires the choice to be disclosed.
Worked example
The same three purchases, 1,000 units at €10, €12 and €15, cost €37,000 for 3,000 units, so the weighted average is €12.33 a unit.
Selling 2,000 units gives cost of sales of €24,667 and closing inventory of €12,333, which add back to the €37,000 spent.
Gross profit of €15,333 sits between the €18,000 FIFO would report and the €13,000 LIFO would report, which is the smoothing effect in one line.