# First in first out fifo this method of assigning cost

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First-in, First-out (FIFO):This method of assigning cost to inventory and the goods soldassumes inventory items are sold in the order acquired. This means the cost flow is in theorder in which the expenditures were made. So, to determine the cost of ending inventory, wehave to start from the most recent purchase and continue to the next recent. Because the firstpurchased items (old purchases) are the first to be sold they are used (included) in thecomputation of cost of goods sold.Example, easily spoiled goods such as fruits, vegetables
13etc., must be sold near the time of their acquisition. So, the inventory on hand will be fromthe recent purchases. As an example, consider the previous illustration. The cost of endinginventory under FIFO method:Br. 40 x 240=Br.9,600Br. 46 x60=2,760300 unitsBr. 12,360Cost of Ending inventory = Br. 12,360Cost of merchandise sold = Br. 59,520 – Br. 12,360 = Br. 47,160c.Last-In First-Out (LIFO):This method of assigning cost assumes that the most recentpurchases are sold first. Their costs are charged to cost of goods sold, and the costs of theearliest purchases are assigned to inventory. The cost flow is in the reverse order in whichexpenditures were made. In calculating the cost of goods sold, we will start from the earliestpurchases. As an example, take the previous illustration again and the cost of endinginventory under LIFO method:Br. 60 x80=Br. 4,800Br. 56 x 220=12,320300 unitsBr. 17,120Ending inventory cost =Br. 17,120Cost of merchandise sold = Br. 59,520 – Br. 17,120 = Br. 42,400d.Weighted Average Method:This method of assigning cost requires computing the averagecost per unit of merchandise available for sale. That means the cost flow is an average of theexpenditures.To calculate the cost of ending inventory, we will calculate first the cost perunit of goods available for sale.Then the weighted average unit cost is multiplied by units on hand at the end of the period tocalculate the cost of ending inventory. Also, the same average unit cost is applied in thecomputation of cost of goods sold. From the above example,Weighted average unit cost = Br. 59,520= Br. 49.601,200Ending inventory cost = Br. 49.60x 300 = Br. 14,880Cost of merchandise sold = Br. 59,520-Br. 14,880 = Br. 44,640Comparison of Inventory costing methodsIf the cost of units and prices at which they are sold remains stable, all the four methods yield thesame results. But if prices change, the three methods usually yield different amounts for:Ending inventoryCost of merchandise soldGross profit or net incomeAverage cost per unit = Cost of goods available for saleTotal units available for sale
13In periods of rising (increasing) prices: (or if there is inflationarytrend):FIFO yields:Higher ending inventoryLower cost of merchandise soldHigher gross profit (net income)LIFO yields:Lower ending inventoryHigher cost of merchandise soldLower gross profit (net income)Weighted average yields the results between the two.

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Term
Winter
Professor
Josh Hasusman
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