I am going to defend weighted average cost and then explain exactly how it betrays you. Both things are true. If you run a yard and your eyes glaze at the word "costing," stay with me, because this is the difference between thinking you made 18% and actually making 9%.
What WAC does well
Weighted average cost takes everything you bought of a material, blends it into one cost-per-pound, and uses that to value what is sitting in the yard. It is simple, it is stable, and for most businesses it is fine.
Copper is not most businesses. Copper moved like this last quarter:
Copper buy price, one yard, one quarter
Real shape of the problem: the input cost is a moving target
Look at week 8. You are buying copper at 401 cents. Your WAC says your copper is "worth" 373 cents. So when you sell a load that week, your software reports a fat margin, because it is comparing today's sale price against a blended cost dragged down by cheaper copper you bought in week 5.
That margin is partly real and partly an accounting artifact. The danger is not the report. The danger is what you do with the report.
Watch out
The decision trap
A yard owner sees "copper margin: 22% this week" and decides copper is hot, so he bids up his buy price to pull more volume. But the 22% was inflated by old, cheap inventory in the blend. As that cheap copper sells through, the blend rises, the real margin compresses, and now he is buying aggressively into a thinning margin. I have watched this exact sequence sink a quarter.
Where the margin actually goes
When we break a typical volatile-material quarter into where the reported "margin" really comes from, it looks roughly like this:
Decomposing a reported 19% gross margin on copper
Aggregated across mid-size yards we worked with, volatile quarter
This is not an argument for FIFO
Before the accountants email me: I am not saying switch everything to FIFO. FIFO has its own distortions and your tax position may make WAC the right call regardless. Talk to your accountant, not a blog.
What I am saying is simpler. Keep WAC for valuation, but never look at it without also seeing this week's actual buy price next to it. The single number is fine for the books. It is dangerous as a steering wheel.
Inventory · Live Valuation
Total: $445,930#1 Copper Bare Bright
Non-Ferrous
Aluminum 6061
Non-Ferrous
Shred Steel HMS-1
Ferrous
Brass Yellow
Non-Ferrous
Stainless 304
Non-Ferrous
2-3pt
Typical margin overstatement
volatile material, rising market
6-10wk
How long the illusion lasts
until the blend catches up
100%
Of it reverses eventually
timing is not a moat
The one habit that fixes most of this
Every Monday, pull two numbers per major material: your blended WAC and your actual average buy price for the last seven days. If they have diverged by more than a few percent, your margin reports for that material are currently fiction in one direction or the other. Adjust your buying confidence accordingly, not your books.
It takes four minutes. It is the single highest-leverage habit I have seen separate yards that compound from yards that have one great quarter and one terrible one and call it variance.
Keep the single cost number for the books. Never use it as a steering wheel.
Written by
Priya Nair
Product Lead, Inventory & Costing
Priya spent six years building ERP costing engines before scrap recycling pulled her in. She is the person who will argue with you for an hour about weighted average cost and then buy you coffee.