In case of large fluctuations in purchase price of

Solution

Under the weighted average cost method, the cost of each unit of inventory is calculated as the total cost of all units purchased divided by the total number of units purchased. This method takes into account the varying purchase prices of inventory and calculates a weighted average cost for all units in inventory. For example, if a company purchases 100 units of inventory at a cost of $10 per unit and then purchases an additional 200 units of inventory at a cost of $12 per unit, the weighted average cost per unit would be calculated as follows: Total cost of inventory = (100 units x $10 per unit) + (200 units x $12 per unit) = $1,000 + $2,400 = $3,400 Total number of units in inventory = 100 units + 200 units = 300 units Weighted average cost per unit = $3,400 ÷ 300 units = $11.33 per unit