3. Weighted Average Method

For finding out the weighted average rate for stock valuation
both quantity and price of different lots of materials existing in the stock are considered.
The weighted average rate is found by adding the costs of all lots held at the time of issue
and then dividing that total cost by the total quantity of the materials held. Once a rate is
calculated it is applied until a new purchase is made. It does not consider whether the
quantities purchased earlier have already been consumed.

Advantages:
(1) If prices fluctuate considerably and issue of materials has to be made in several lots, this
method becomes very much useful.
(2) Weighted average rate is mathematically sound as it considers both quantity and price.
(3) During inflation, the value of stock becomes much more realistic.
(4) One rate can be consistently applied till a new purchase is made.

Disadvantages :
(1) The prices at which goods are issued do not reflect their actual costs.
(2) Closing stock cannot show the current market price.
(3) Where purchases and receipts of materials are frequent, this method results into mathematical
complications.
(4) If arithmetical accuracy is ignored at the time of calculating the weighted average rate,
unrealised profit or loss may creep into the value of materials.