First-In, First-Out (FIFO) Method

First-In, First-Out (FIFO) is one of the methods commonly used to calculate the value of inventory on hand at the end of an accounting period and the cost of goods sold during the period. This method assumes that inventory purchased or manufactured first is sold first and newer inventory remains unsold. Thus cost of older inventory is assigned to cost of goods sold and that of newer inventory is assigned to ending inventory. The actual flow of inventory may not exactly match the first-in, first-out pattern.

First-In, First-Out method can be applied in both the periodic inventory system and the perpetual inventory system. The following example illustrates the calculation of ending inventory and cost of goods sold under FIFO method:

Example

Use the following information to calculate the value of inventory on hand on Mar 31 and cost of goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory system.

Mar 1Beginning Inventory68 units @ $15.00 per unit
5Purchase140 units @ $15.50 per unit
9Sale94 units @ $19.00 per unit
11Purchase40 units @ $16.00 per unit
16Purchase78 units @ $16.50 per unit
20Sale116 units @ $19.50 per unit
29Sale62 units @ $21.00 per unit

Solution

FIFO Periodic

Units Available for Sale= 68 + 140 + 40 + 78= 326
Units Sold= 94 + 116 + 62= 272
Units in Ending Inventory= 326 − 272= 54
    
Cost of Goods SoldUnitsUnit CostTotal
Sales From Mar 1 Inventory68$15.00$1,020
Sales From Mar 5 Purchase140$15.50$2,170
Sales From Mar 11 Purchase40$16.00$640
Sales From Mar 16 Purchase24$16.50$396
 272 $4,226
    
Ending InventoryUnitsUnit CostTotal
Inventory From Mar 16 Purchase54$16.50$891

FIFO Perpetual

DatePurchasesSalesBalance
UnitsUnit CostTotalUnitsUnit CostTotalUnitsUnit CostTotal
Mar 1      68$15.00$1,020
5140$15.50$2,170   68$15.00$1,020
       140$15.50$2,170
9   68$15.00$1,020114$15.50$1,767
    26$15.50$403   
1140$16.00$640   114$15.50$1,767
       40$16.00$640
1678$16.50$1,287   114$15.50$1,767
       40$16.00$640
       78$16.50$1,287
20   114$15.50$1,76738$16.00$608
    2$16.00$3278$16.50$1,287
29   38$16.00$60854$16.50$891
    24$16.50$396   

Written by Irfanullah Jan