How to calculate first in first out method

How to calculate first in first out method

In accounting and inventory management, first-in, first-out (FIFO) is a commonly used costing method. It assumes that the earliest goods purchased or produced are sold first, so the cost of ending inventory reflects the cost of the most recently purchased or produced goods. This method more accurately reflects current market prices during inflationary times, but may also result in higher taxable income. Below we will introduce the calculation method of the first-in-first-out method in detail and show specific cases through structured data.

1. Basic principles of first-in-first-out method

The core idea of the first-in, first-out method is "first in, first out". When calculating the cost of sales, the earliest inventory cost is used first, while the ending inventory uses the cost of the latest inventory. This method works for most items, especially items that are perishable or out of season.

2. Calculation steps of first-in-first-out method

1.Record inventory inflows and outflows: Record in detail the quantity and unit cost of each incoming warehouse, as well as the quantity of each outgoing warehouse.

2.Match outbound and inbound chronologically: Priority will be given to using the earliest inventory cost when leaving the warehouse.

3.Calculate cost of sales: Calculate the cost of each outbound shipment based on the matching inbound cost.

4.Calculate ending inventory: The cost of remaining inventory is the cost of the most recent storage.

3. Specific cases of first-in-first-out method

The following is a simple first-in-first-out calculation case, assuming that a company has the following inventory changes in a certain month:

4. Calculation process of first-in-first-out method

1.150 pieces shipped out on January 10th: Priority will be given to using the 100 pieces put into storage on January 1st (cost 10 yuan/piece), and then the 50 pieces put into storage on January 5th (cost 12 yuan/piece). Cost of sales = 100×10 + 50×12 = 1,600 yuan.

2.200 pieces shipped out on January 20: All the remaining 150 pieces (cost 12 yuan/piece) put into storage on January 5th will be shipped out of the warehouse, and the 50 pieces put into storage on January 15th (cost 15 yuan/piece) will be used. Cost of sales = 150×12 + 50×15 = 2550 yuan.

3.Ending inventory: The remaining 250 pieces that were put into storage on January 15 cost 15 yuan/piece. Ending inventory cost = 250×15 = 3750 yuan.

5. Advantages and disadvantages of first-in-first-out method

Advantages:

1. Comply with the physical flow rules of most commodities.

2. In times of inflation, it can more accurately reflect current market prices.

3. The ending inventory cost is close to the current market price, and the balance sheet is more realistic.

Disadvantages:

1. In times of inflation, the cost of goods sold is lower, potentially resulting in higher taxable income.

2. The calculation is complex, especially when inventory flows frequently.

6. Comparison between the first-in-first-out method and other methods

Compared with the last-in-first-out (LIFO) and weighted-average methods, the first-in-first-out method has lower sales costs and higher ending inventory costs during inflationary periods. Here is a simple comparison of the three methods:

7. Summary

The first-in, first-out method is an intuitive cost calculation method that conforms to the flow patterns of most commodities. It provides more accurate financial statements during times of inflation, but may also result in higher taxable income. When enterprises choose cost calculation methods, they should weigh them based on their own business characteristics and financial goals.