First-In, First-Out Inventory Method
First-In, First-Out (FIFO) is one of the methods commonly used to estimate 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 1 | Beginning Inventory | 68 units @ $15.00 per unit |
5 | Purchase | 140 units @ $15.50 per unit |
9 | Sale | 94 units @ $19.00 per unit |
11 | Purchase | 40 units @ $16.00 per unit |
16 | Purchase | 78 units @ $16.50 per unit |
20 | Sale | 116 units @ $19.50 per unit |
29 | Sale | 62 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 Sold | Units | Unit Cost | Total |
Sales From Mar 1 Inventory | 68 | $15.00 | $1,020 |
Sales From Mar 5 Purchase | 140 | $15.50 | $2,170 |
Sales From Mar 11 Purchase | 40 | $16.00 | $640 |
Sales From Mar 16 Purchase | 24 | $16.50 | $396 |
272 | $4,226 | ||
Ending Inventory | Units | Unit Cost | Total |
Inventory From Mar 16 Purchase | 54 | $16.50 | $891 |
FIFO Perpetual
Date | Purchases | Sales | Balance | ||||||
Units | Unit Cost | Total | Units | Unit Cost | Total | Units | Unit Cost | Total | |
Mar 1 | 68 | $15.00 | $1,020 | ||||||
5 | 140 | $15.50 | $2,170 | 68 | $15.00 | $1,020 | |||
140 | $15.50 | $2,170 | |||||||
9 | 68 | $15.00 | $1,020 | 114 | $15.50 | $1,767 | |||
26 | $15.50 | $403 | |||||||
11 | 40 | $16.00 | $640 | 114 | $15.50 | $1,767 | |||
40 | $16.00 | $640 | |||||||
16 | 78 | $16.50 | $1,287 | 114 | $15.50 | $1,767 | |||
40 | $16.00 | $640 | |||||||
78 | $16.50 | $1,287 | |||||||
20 | 114 | $15.50 | $1,767 | 38 | $16.00 | $608 | |||
2 | $16.00 | $32 | 78 | $16.50 | $1,287 | ||||
29 | 38 | $16.00 | $608 | 54 | $16.50 | $891 | |||
24 | $16.50 | $396 |
by Irfanullah Jan, ACCA and last modified on