There are several methods of inventory valuation and FIFO is one of them. Under this method, we assume that items purchased first are also sold first. It means that the remaining inventory/closing inventory is the one which is purchased/ manufactured at the end. The cost of sale under this method which comprises cost of inventory purchased/ manufactured earlier. The cost of sale figure depends upon the value of the older inventory items. This method of inventory valuation is very effective in FMCG (fast moving consumer goods) companies where goods are of perishable nature.
Applications
FIFO method can be applied in both periodic inventory system and perpetual inventory system.
Example Question Periodic Inventory System
Tata manufacturing uses periodic inventory system. The opening inventory of one item on 1 January and purchases during the month of January are as follows:
| Jan 1 | Inventory | 10,000 units | @$12 |
| Jan 8 | Purchases | 15,000 units | @$16 |
| Jan 14 | Purchases | 18,000 units | @$18 |
| Jan 22 | Purchases | 12,000 units | @$19 |
| Jan 27 | Purchases | 5,000 units | @$21 |
During the month of Jan,35,000 units were sold.
Required:
Determine the cost of ending inventory and cost of goods sold.
Answer
Purchase Schedule
| Date | Description | Units | Rate ($) | Total |
| Jan 01 | Opening | 10,000 | 12 | 120,000 |
| Jan 08 | Purchases | 15,000 | 16 | 240,000 |
| Jan 14 | Purchases | 18,000 | 18 | 324,000 |
| Jan 22 | Purchases | 12,000 | 19 | 228,000 |
| Jan 27 | Purchases | 5,000 | 21 | 105,000 |
| Available for sale | 60,000 | 1,017,000 |
| Units available for sale | (10,000+15,000+18,000+12,000+5000) | 60,000 |
| Units sold | 35,000 | |
| Units at end | (60,000-35,000) | 25,000 |
Cost of material closing inventory
FIFO Method
Periodic System
| Date | Description | Units | Rate ($) | Total |
| Jan 14 | Purchases | 8,000 | 18 | 144,000 |
| Jan 22 | Purchases | 12,000 | 19 | 228,000 |
| Jan 27 | Purchases | 5,000 | 21 | 105,000 |
| Closing inventory | 25,000 | 477,000 |
Cost of Goods Sold
| Description | FIF0 |
| Opening inventoryAdd: PurchasesInventory available for saleLess: Closing InventoryCost of goods sold | 120,000897,0001,017,000(477,000)540,000 |
Example Question FIFO Perpetual Inventory System
Safina Telecom is a well-known brand of optical computer devices. It has a big warehouse in the South London. Fir its inventory records, Safina uses Perpetual Inventory System. Following are the transactions related to its inventory for the month of August 2016.
| Aug 5 | Safina bought 60 computers @ $ 10,000. |
| Aug 22 | Purchased 40 computers @ $ 12,000. |
| Aug 25 | Safina purchased 50 computers @ $ 11,000. |
| Aug 28 | Sold 80 computers @ $ 15,000 on credit. |
Required
Compute the cost of goods sold and gross profit of 80 computers under FIFO method.
Solution
Safina Telecom
Cost of goods sold – FIFO Method
| 60 units @ $ 10,000 each | 600,000 |
| 20 units @ $ 12,000 each | 240,000 |
| 80 units sold – cost of goods sold | 840,000 |
Safina Telecom
Gross Profit Computation
| Sales (80 x 15,000) | 1,200,000 |
| Less: Cost of goods sold | 840,000 |
| Gross Profit | 360,000 |
FIFO Method of Inventory Valuation – Periodic System
Aminta LLC is a shoe manufacturing company. It uses periodic inventory system to manage the inventory which is a large portion of its current asset. Following is the data of Sep 30, 2017 related to the inventory:
| Sep 01 | Opening inventory | 600 units | @27.5 |
| Sep 04 | Purchases | 750 units | @29 |
| Sep 12 | Purchases | 800 units | @32.5 |
| Sep 20 | Sales | 750 units | @30 |
| Sep 22 | Sales | 350 units | @33 |
| Sep 24 | Purchases | 600 units | @35 |
| Sep 30 | Sales | 400 units | @40 |
Required
You are required to:
Compute the cost of closing inventory and cost of goods sold at the end of Sep 30, 2017 under each of the FIFO method.
Solution
Schedule – Total Cost of September, 2017
| Date | Description | Units | Per Unit Cost | Cost |
| Sep 01 | Opening inventory | 600 | 27.5 | 16,500 |
| Sep 04 | Purchases | 750 | 29 | 21,750 |
| Sep 12 | Purchases | 800 | 32.5 | 26,000 |
| Sep 24 | Purchases | 600 | 35 | 21,000 |
| Total Units | 2750 | 85,250 | ||
| Units sold | 1500 | |||
| Closing inventory | 1250 |
Aminta LLC
Closing Inventory Cost – FIFO Method
For the Period Ended Sep 30, 2017
| Date | Description | Units | Per Unit Cost | Cost |
| 12 Sep | Purchases | 650 | 32.5 | 21,125 |
| 24 Sep | Purchases | 600 | 35 | 21,000 |
| 30 Sep | Ending inventory | 1250 | 42,125 |