Weighted average cost (WAC) is a financial metric used to calculate the average cost of a company's assets or liabilities. It takes into account the relative weight of each cost component in the overall cost structure.
Weighted average cost is calculated by multiplying the cost of each component by its respective weight, adding all the values together, and then dividing by the total weight. The formula is (Cost of Component 1 x Weight of Component 1) + (Cost of Component 2 x Weight of Component 2) + ... / Total Weight.
Weighted average cost is important because it provides a more accurate representation of the true cost of a company's assets or liabilities. It takes into account the varying weights of different costs, rather than simply averaging them together. This can help companies make more informed financial decisions.
The main difference between weighted average cost and simple average cost is that weighted average cost takes into account the relative weights of each cost component, while simple average cost does not. This means that weighted average cost is a more accurate measure of the true cost of a company's assets or liabilities.
Weighted average cost can be used in decision making by providing a more accurate representation of the cost of a company's assets or liabilities. This can help companies determine the most cost-effective options and make informed decisions about investments, pricing strategies, and resource allocation.