Most commonly used cost formulas or methods of inventory valuation include First-in, First-out (FIFO) method. The name “First-in, First-out” itself explains the basic assumption of this method, i.e. inventory purchased or manufactured first will be sold or consumed first, which means that at any time, value of inventory in hand will be the cost of most recently acquired units of inventory.
Rephrasing the basic assumption; In FIFO, it is assumed that inventory items are sold or consumed in the order in which these items are purchased or manufactured. Older items of inventory get sold first and newer items remain in the inventory. However, it must be noted that this is merely an assumption used to calculate the cost of goods sold and value of inventory in hand. Actual physical flow of inventory may not be in accordance with this FIFO assumption.
Application of FIFO Method
FIFO method can be applied in Perpetual Inventory System as well as in Periodic Inventory System. The following example will elaborate how FIFO method is applied to calculate the cost of goods sold and value of inventory in hand.
Example
On 1 June, XYZ Company had an opening balance of 80 units of inventory costing $25 per unit. During the month of June, XYZ Company made following transactions:
Purchases
- 3 June – 280 units @ $30 per unit
- 12 June – 480 units @ $40 per unit
- 20 June – 180 units @ $35 per unit
Sales
- 7 June – 180 units
- 9 June – 150 units
- 15 June – 200 units
- 25 June – 350 units
Calculate the following using FIFO method of valuation:
a) Cost of goods sold for the month of June
b) Value of inventory as at 30 June
Answer
FIFO (Periodic System of Inventory)
Movement of Inventory (Units)
| Opening inventory | 80 |
| Purchases (280 + 480 + 180) | 940 |
| Units available for sale | 1020 |
| Units sold (180 + 150 + 200 + 350) | 880 |
| Closing inventory | 140 |
Cost of Goods Sold
| Date | Units | Rate ($) | Cost ($) | |
| 180 units sold * 80 from opening |
a 7 Jun |
a 80 |
a 25 |
a 2,000 |
| * 100 from 3 June procurement | 7 Jun | 100 | 30 | 3,000 |
| 150 units sold * from 3 June procurement |
a 9 Jun |
a 150 |
a 30 |
a 4,500 |
| 200 units sold * 30 from 3 June procurement |
a 15 Jun |
a 30 |
a 30 |
a 900 |
| * 170 from 12 June procurement | 15 Jun | 170 | 40 | 6,800 |
| 350 units sold * 310 from 12 June procurement |
a 25 Jun |
a 310 |
a 40 |
a 12,400 |
| * 40 from 20 June procurement | 25 Jun | 40 | 35 | 1,400 |
| 880 | 31,000 |
Closing Inventory
| Units | Rate ($) | Cost ($) | |
| 140 units left out of latest lot of procurement | a 140 |
a 35 |
a 4,900 |
FIFO (Perpetual System of Inventory)
| Date | Purchases | Sales | Balance | ||||||
| Units | @ | $ | Units | @ | $ | Units | @ | $ | |
| 1 Jun | 80 | 25 | 2,000 | ||||||
| 3 Jun | 280 | 30 | 8,400 | 80 | 25 | 2,000 | |||
| 280 | 30 | 8,400 | |||||||
| 7 Jun | 80 | 25 | 2,000 | 180 | 30 | 5,400 | |||
| 100 | 30 | 3,000 | |||||||
| 9 Jun | 150 | 30 | 4,500 | 30 | 30 | 900 | |||
| 12 Jun | 480 | 40 | 19,200 | 30 | 30 | 900 | |||
| 480 | 40 | 19,200 | |||||||
| 15 Jun | 30 | 30 | 900 | 310 | 40 | 12,400 | |||
| 170 | 40 | 6,800 | |||||||
| 20 Jun | 180 | 35 | 6,300 | 310 | 40 | 12,400 | |||
| 180 | 35 | 6,300 | |||||||
| 25 Jun | 310 | 40 | 12,400 | 140 | 35 | 4,900 | |||
| 40 | 35 | 1,400 | |||||||
| 31,000 | |||||||||
Cost of goods sold = $31,000
Closing inventory = $4,900