Weighted Average Cost Per Unit

by Basheer Ahmed
(Saudi Arabia)

Q: Dear Sir,

A container of goods has different quantities with different values per unit. For example the total value of the goods are USD 280,000, but per the invoice, this figure also contains freight, handling charges and insurance of say USD 12,500. How do I find out the individual item cost or cost per unit?

A: Basheer, the container should have come with a document listing the quantities and values of each of the goods. This is known as a shipping list, packing list or waybill. There may also be a pro-forma invoice with the shipment that displays this information. If this is not available for valuing the goods then one would use the weighted average cost method.

Using this method, you get an average cost for valuing all the goods. To do this you just take the total value of the inventory (including the costs of getting it to its destination - freight, handling and insurance) and divide this by the quantity. This is the weighted average cost method of inventory valuation.

Let's say the quantity of goods is 10,000 units.

The calculation of the cost per unit is then:
$280,000/10,000 units = $28 unit cost

That is the weighted average cost of each unit.