Weighted-average costing values stock at the running average cost of all units on hand, recalculated as new purchases arrive. It smooths out price fluctuations, so COGS and closing stock sit between the extremes that FIFO can produce.
It is simple to maintain and well suited to fungible goods where individual lots are not tracked separately.
The recalculation is mechanical. Holding 100 units carried at ₹100 each (₹10,000), a firm buys 50 more at ₹130 (₹6,500). The new average is ₹16,500 divided by 150 units — ₹110. A subsequent sale of 60 units is costed at ₹6,600, leaving 90 units in stock at ₹9,900. Every rupee spent is accounted for; the average simply spreads it evenly across whatever remains.
Two flavours exist. The moving average, used by perpetual systems, recomputes the rate at every receipt, so each sale is costed at the rate prevailing that day. The periodic weighted average instead waits until the period ends and computes one rate from total cost divided by total units available, applying it to everything sold. The two can give different figures for the same transactions, so the choice should be made once and kept.
The method's weakness is its sensitivity to record-keeping discipline. Allowing stock to go negative — billing goods before their purchase is entered — makes the average meaningless, and a backdated purchase forces every later issue to be re-costed. Free quantities and trade discounts need care too: goods received free of cost pull the average down only if entered at nil value deliberately, not accidentally omitted from quantity altogether.