First In First Out FIFO Method – Inventory Cost Formula



First In First Out Method (FIFO Method)

The First In First Out Method or FIFO method assumes that “the goods first purchased are first sold” and consequently the goods remaining in the inventory at the end of the period are those most recently purchased or produced.

Under FIFO, cost of goods sold represents costs from earlier purchases while cost of ending inventory represents costs from the most recent purchases. Therefore, FIFO results to the highest income in period of inflation or rising prices and the lowest income in period of deflation or declining prices. This method favors the statement of financial position in that the inventory is stated at current replacement cost.

The FIFO formula can be used under a periodic or perpetual inventory system. However, FIFO yields the same amounts of cost of goods sold and ending inventory when applied in either a perpetual or periodic system.

ILLUSTRATION:

Merryloo CO. is a wholesaler of MacMac Cymbals. The activity for the product Cymbals during March is shown below:

fifo method



Solution: FIFO Periodic

fifo periodicThe concept that the cost of ending inventory under FIFO is from the cost of the most recent purchase, the ending inventory in units is allocated as follows:

fifo periodic

fifo periodicNotice that the sum of ending inventory and cost of goods sold is equal to the total goods available for sale.



Solution: FIFO Perpetual

fifo perpetual

Cost of Goods Sold is derived from the table above as follows:

Cost of Goods Sold = 250 000 + 56 000 + 504 000

Cost of Goods Sold = P 810 000

Notice that FIFO Periodic and FIFO Perpetual yield the same amounts of Cost of Goods Sold and Ending Inventory.




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