Financial Glossary
Weighted Average (in Accounting)
A weighted average is a mean in which each value contributes according to an assigned weight rather than counting equally. In accounting it underlies methods such as weighted-average inventory costing, weighted-average shares outstanding, and the weighted-average cost of capital. The result is found by multiplying each value by its weight, summing those products, and dividing by the total of the weights.
Problem & Application
An operator carrying inventory bought at different prices can use the weighted-average method to assign one blended cost per unit, smoothing out price swings instead of tracking each lot separately. The same logic applies when a business reports earnings per share across a period in which the share count changed, or blends interest rates across multiple loans. Choosing and applying the weighting consistently keeps cost of goods sold and margins comparable period to period.
In Short
Weighting values by their relative size produces a more representative average than a simple mean whenever the underlying amounts differ in magnitude.