 Hello in this lecture we're going to define weighted average or the weighted average method According to fundamental accounting principles while 22nd edition of the definition of weighted average is method for assigning inventory costs to sales the cost of available for sale units is Divided by number of units available to determine per unit cost prior to each sale That is then multiplied by the units sold to yield the cost of the sale That's a bit long because we're describing the actual calculation here But the average cost flow assumption the average method is a cost flow assumption method meaning We're trying to value the inventory the inventory that we are then going to sell. We're not going to be using specific Identification we're going to use some kind of estimate some kind of cost flow method similar to first-in first-out similar to last-in first-out We are now going to use the average method to make an average of those units that we then sell Let's take a look at an example We are purchasing and selling very expensive coffee mugs here and the first units that we have We had a hundred units that we purchased for $50, so we currently have 5,000 units if we sold any coffee mugs at that point in time It wouldn't be very difficult to know what the cost was it was $50 However, if we purchase more units of the same exact coffee mugs The price may change just due to factors like inflation and input cost if we purchased 400 more units For example at $55 then now we're gonna say we purchased 400 at $55 So we have two different costs for the same coffee mug that we then sell if we use a cost flow assumption We don't know exactly which mug we're gonna sell question then is are we gonna cost the sale of that mug at $50 or $55 when we sell it under an average method. We'll say how about neither why don't we take the average of the two and You might be thinking that an average would be just 50 plus 55 Divided by two, but we're really using kind of a weighted average because there's a lot more units at The 55 then the 50 so we're gonna have to do the calculation that will be something like this We've got the hundred units at 50. We've got 400 units at 55 That means we have 500 units and the total cost then is the 5,000 plus the 22,000 or 20 to 7,000 We can then calculate the average to be 27,000 divided by 500 or 54,000 which is obviously closer to the 55 number than to the 50 number Why because there's a lot more of them at that 55 that number then would be on the trial balance or the balance sheet This is the dollar amount representing those 500 units that we have average cost for any of those units now being $54 therefore if we sold some units we're selling 420 at 85 that's the sales price not the cost what will be the cost the cost will of course be The $54 so the cost of the goods sold it's going to be that 54 in this case All of them will be at that 54 what will be left over. We have 5,500 units we sold 420 we're left with 80 units again at the average cost of 54 Leaving us with 4,320 in Indian inventory This would be the cost of goods sold in this case that we sold if we sold those 420 units This would be the dollar amount that would be left over in Indian inventory