1.

The First-In-First-Out Method (FIFO)

This method assumes that the first inventories bought are the first ones to be sold,
and that inventories bought later are sold later.

he value of our closing inventories in this example would be calculated as follows:

Using the First-In-First-Out method, our closing inventory comes to $1,100. This equates to
a cost of $1.10 per lollypop ($1,100/1,000 lollypops).

Thus the first-in-first-out method is probably the most commonly used method in small
business. Well, probably...

2. The Last-In-First-Out Method (LIFO)

This method assumes that the last inventories bought are the first ones to be sold,
and that inventories bought first are sold last.

The value of our closing inventories in this example would calculated as follows:

Using the Last-In-First-Out method, our closing inventory comes to $1,000. This equates to
a cost of $1.00 per lollypop ($1,000/1,000 lollypops).
The LIFO method is commonly used in the U.S.A.

3. The Weighted Average Cost Method

This method assumes that we sell all our inventories simultaneously.

The weighted average cost method is most commonly used in manufacturing businesses
where inventories are piled or mixed together and cannot be differentiated, such as
chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those
bought yesterday, as they are all mixed together.

So we work out an average cost for all chemicals that we have in our possession. The
method specifically involves working out an average cost per unit at each point in time after
a purchase.

In our example above (assuming the weighted average cost method was allowed for valuing
the lollypops), the value of our closing inventories would be calculated as follows:
Using the weighted average cost method, our closing inventory amounts to $1,059. This
equates to a cost of $1.06 per lollypop ($1,059/1,000 lollypops).

Oddly enough, the LIFO method is the preferred inventory valuation method in the United
States but is disallowed in non-US countries. The FIFO method and the weighted average
cost method are used in non-US countries. In recent years there have been calls for the
standardization of accounting rules throughout the world, and talk specifically about
disallowing LIFO in the US (or making the rest of the world follow the LIFO system). As of
this writing the matter has not been resolved and the differences in inventory valuation still
exist.

Return from The FIFO Method & Weighted Average Cost to Inventory

Return from The FIFO Method & Weighted Average Cost to Home Page

Previous lesson: What is Inventory?

Next lesson: Cost of Goods Sold

Enjoying this Website?

Help Support it with a Donation

OR...
 Facebook Twitter Google
Share this page:
Pinterest Tumblr Reddit

Questions Relating to This Lesson

Click below to see questions and exercises on this same topic from other visitors to this
page... (if there is no published solution to the question/exercise, then try and solve it
yourself)

lifo and average costing

Under what conditions lifo and weighted average process costing consistently produce same
costing figure?

FIFO Examples in Real Life

Give at least 5 examples of fifo in general life?

FIFO Method Question

Date Particulars Units Rate 01.03.09 opening stock 100 $1.75 05.03.09 purchased 150
$1.50 12.03.09

Best Inventory method

What is the best inventory method that can be used in an organization?

Weighted Average Cost Question

(Multiple Choice)
If the company uses weighted average method for inventory valuation, the value of
inventory as on March 31, 2005 is: a. $11967 b. $12000 c. $12500

Inventory Ledger Account Exercise

Below is the records of receipts and issues of a certain material in a factory for the month
ending 30th September, 2008. Receipts: Sept. 1- opening

Stock Returns (Weighted Average Cost Method)

What happens when stock is returned, using the weighted average cost method?

Define Reorder Level

What is the reorder level?
Stock Variance FIFO Method
Q: What would be the applied price of a stock variance in the FiFo method?

Weighted Average Method

Q: What are the advantages and disadvantages of using the weighted average method?

FIFO Method Accuracy

Q: What is the degree of accuracy of the FIFO method when using it in the balance sheet as
well as the income statement?

Accounting Question - LIFO Method

Why would tax accountants prefer to use last-in-first-out method?

Pricing System - FIFO, LIFO and Weighted AVerage

There was an opening balance of 100 units which had a value of #3900. Bought: may
100units @ #41, june 200units @ #50, august 400units @ #51.875, sold:

FIFO METHOD Formula

WHAT IS A COMPUTERISED FORMULAE FOR FIFO METHOD WHEN CALCULATING THE VALUE
OF THE CLOSING INVENTORY?

Material Pricing and Valuation of Stock

(FIFO, LIFO & Weighted Average Cost Question)
The following details are extracted from the stores ledger card of a small manufacturing
company during the month of November 2009 (please note that Shs

The Weighted Average Cost Method

Q: How do I find the average cost per unit of inventory using the weighted average cost
method?

Valuation of Work In Progress under Process Costing

Q: Under process costing, how do you find the cost per unit while using the FIFO method
and the WAM method?

FIFO, LIFO & Weighted Average

Cost Exercise
Q: Using FIFO, LIFO, and weighted average, what is the ending cost of inventory?

How are LIFO

Purchase Returns Handled?
Q: How are LIFO Purchase returns handled?

FIFO Method Question

1/3/2009 1 Mar opening balance 880 @ $9 2 Mar purchase 300 @ $6 4 Mar sell 400 6 Mar
sell 600 10 Mar purchase 400 @ $8 15 Mar purchase 500 @ $5
Weighted Average Cost Per Unit
Q: Dear Sir, A container of goods has different quantities with different values per unit. For
example the total value of the goods are USD 280,000,

Regarding Valuation of Closing Stock of Raw Materials

Q: I want to know whether storage costs (rent for storage of materials until it is used in
production) will be considered for valuation of closing stock

Advantages of FIFO and LIFO Methods

Q: What are the advantages of the FIFO and LIFO methods?

Sales Return Under the LIFO Method

Q: What will the entry be if there is a sales return under the LIFO method?

Comments

Have your say about what you just read! Leave me a comment in the box below.

Advertise on Accounting-Basics-for-Students.com

Copyright 2009-2016 Michael Celender. All Rights Reserved. Click here for Privacy Policy.

SBI!