Weighted-average cost, explained for shop owners

You bought the same widget three times this year at three different prices. So when you sell one today, what did it cost you? If you can't answer that confidently, your margins are fiction, and weighted-average costing is the fix.

The problem: cost isn't a single number

Say you bought:

• 10 units at $4.00
• 10 units at $5.00
• 10 units at $6.00

You now hold 30 units. What's the cost of the next one you sell? You could pick the oldest cost (FIFO), the newest (LIFO), or... just average it sensibly by quantity. That last option is weighted-average cost.

The math (it's simple)

Weighted-average cost is total value divided by total units:

(10×$4 + 10×$5 + 10×$6) / 30
= ($40 + $50 + $60) / 30
= $150 / 30
= $5.00 per unit

Every time stock comes in at a new price, you recompute the average against what you already hold. Sell a unit, and $5.00 is your cost of goods sold (COGS) for that sale, the basis for your margin.

Why it beats "whatever I paid last"

Using your latest purchase price for everything overstates or understates profit whenever prices move. Weighted-average smooths that out, so a temporary supplier spike doesn't make your best-seller look unprofitable for a week. It's also the costing method most small-business accountants expect.

The catch: you have to track every movement

Weighted average only works if you recompute on every inbound movement: receipts, returns, positive adjustments. Do that by hand and you'll fall behind by Tuesday.

This is exactly what a movement ledger automates. In Stockroom, every stock change is an append-only ledger entry with a unit cost. The moment you receive a purchase order, the variant's weighted-average cost recalculates in the same transaction. When you sell, that cost is captured on the line as COGS. Your valuation, P&L and margins all trace back to real numbers, automatically.

The payoff

Once cost is honest, everything downstream gets trustworthy: which products actually make money, what a discount really gives away, and what your inventory is truly worth at period-end. That's the whole point of costing: not accounting for its own sake, but decisions you can trust.