INVENTORY COSTING METHODS
Inventory costing methods are used to value inventory that was sold during an accounting period
and amounts remaining on hand at the end of the period. The methods that will be covered are
FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Weighted Average.
RISING PRICES
Example: During a normal accounting period costs of inventory will usually rise. As costs rise the profit
provided by each sale becomes smaller. The general picture of FIFO, LIFO, and Average Costs during a
period of rising costs is depicted below.
Date DR CR Cost/unit Tot Cost
1/1/2006 beginning 500 8.00$ 4,000.00$
1/4/2006 purchased 700 10.00$ 7,000.00$
1/10/2006 sold 900
1/13/2006 purchased 1000 13.00$ 13,000.00$
1/21/2006 sold 600
1/29/2006 purchased 300 18.00$ 5,400.00$
1/31/2006 sold 700
1/31/2006 ending 300 29,400.00$
Cost of Goods Available for Sale 29,400.00$
Total Units Available for Sale
2500
FIFO - First in, First Out
Total Units Sold From Units Cost/Unit Total Cost
2200 1/1/2006 500 8.00$ 4,000.00$
1/4/2006 700 10.00$ 7,000.00$
1/13/2006 1000 13.00$ 13,000.00$
Cost Of Goods Sold 24,000.00$
Ending Inventory 1/29/2006 300 18.00$ 5,400.00$
Inventory
* In this situation, the first inventory item that was purchased is the first inventory item that is sold.
After the oldest inventory items are sold, the next oldest items are sold. This information can be
tracked by following the dates in the inventory account.
LIFO - Last in, First out
Total Units Sold From Units Cost/Unit Total Cost
2200 1/29/2006 300 18.00$ 5,400.00$
1/13/2006 1000 13.00$ 13,000.00$
1/4/2006 700 10.00$ 7,000.00$
1/1/2006 200 8.00$ 1,600.00$
Cost Of Goods Sold 27,000.00$
Ending Inventory 1/29/2006 300 8.00$ 2,400.00$
* In this situation, the last inventory item that was purchased is the first inventory item that is sold.
After the newest inventory items are sold, the next most recently purchased items are sold. This
information can be tracked by following the dates in the inventory account.
