What is Weighted Average Costing (WAC) method in Zoho Inventory?

Weighted Average Costing (WAC) is an inventory valuation method that calculates the average cost of all inventory items. This average cost is then used to determine the Cost of Goods Sold (COGS) and the value of your remaining stock .

Here’s How the Weighted Average Cost Is Calculated (WAC):

The Weighted Average Cost (WAC) method calculates the total value of available quantities and divides it by the total quantity available.

In simple terms,

Let’s break it down with an example,

1. Initial Transaction:

2. Weighted Average Costing (WAC) Calculation:

This means every unit of stock is now valued at 16.67.

3. Sales Transaction

Here’s How the Weighted Average Costing (WAC) Is Then Updated:

With Moving Average Costing/Perpetual Average, the WAC is recalculated every time you add new stock. Here’s an example of how this works:

1. New Transactions

2. Updated WAC:

Here’s how we can calculate the updated Weighted Average Costing:

Applying this formula, we get:

3. Sale after update:

Use Cases

Let’s take a look at some of the other use cases for WAC:

• Negative Inventory
• Half Inventory
• Zero Inventory
• Backdated Transactions

Negative Inventory

Use Case: You record a sales transaction before purchase, causing inventory to temporarily go negative. This can happen if stock is sold before it’s recorded in the system.

Example:

WAC after purchase:

• Total cost = 2 × 20 = 40
• Total quantity = 2 (even though 1 was already sold, it is now fulfilled)
• WAC = 20
• Backdated sale on Jan 5 will use this updated WAC

Half Inventory

Use Case: You sell a fractional quantity (common in industries dealing with bulk goods, liquids, fabrics, etc.)

Example:

WAC = 30 (no change until a new purchase is made)

Zero Inventory

Use Case: You completely deplete your stock with a sale. Useful for confirming that WAC resets only with new purchases.

Example:

WAC = 15 before sale
After Sale: Inventory = 0, WAC remains unchanged until new purchase

Backdated Transaction

Use Case: You add or edit a transaction with a backdated entry. This can affect historical WAC and COGS if the system recalculates retroactively.

Example:

The April 5 sale now uses WAC = 23.33 instead of 25.