In inventory valuation, what does weighted average cost help do?

• A. It assigns the cost of the most expensive items to all units.
• B. It smooths price fluctuations by averaging per-unit cost.
• C. It uses the most recent purchase price for all units.
• D. It ignores quantity discounts.

Answer: (B)

The key idea is blending all purchase costs into a single per-unit cost. Weighted average cost takes the total cost of goods available for sale (beginning inventory plus purchases) and divides it by the total units available. The resulting per-unit cost is then applied to all units sold and to ending inventory. This smooths price fluctuations because changes in purchase prices across different batches are averaged into one constant cost per unit, rather than sticking to the price of the most recent purchase or the cost of specific items. It’s especially appropriate for interchangeable items where tracking exactly which unit came from which batch is impractical. It also reflects that discounts affecting the total cost reduce the average cost per unit, rather than assigning a single high or recent price to all units.