FIFO Inventory Cost Method

Definition:

FIFO, which stands for "first-in-first-out," is an inventory costing method which assumes that the first items placed in inventory are the first sold. Thus, the inventory at the end of a year consists of the goods most recently placed in inventory. FIFO is one method used to determine Cost of Goods Sold for a business .

Here is how inventory cost is calculated using the FIFO method:
Assume a product is made in three batches during the year. The costs and quantity of each batch are:

• Batch 1: Quantity 2,000 pieces, Cost to produce $8000
  
• Batch 2: Quantity 1500 pieces, Cost to produce $7000
  
• Batch 3: Quantity 1700 pieces, Cost to produce $7700

Let's say you sold 4000 units during the year, out of the 5200 produced.
Then calculate the unit costs for each batch:

• Batch 1: 8000/2000 = 4
  
• Batch 2: 7000/1500 = 4.667
  
• Batch 3: 7700/1700 = 4.529

So, of the 4000 units sold, using FIFO

• The first 2000 units sold from the first batch cost $4 per unit.
  
• The next 1500 units sold from the second batch cost $4.667 per unit.
  
• And the last 500 units sold from the third batch cost $4.529.

The cost of the remaining 1200 units from the third batch is $4.529. These units will start off the second year.

Also Known As: First-In-First-Out