RESULTS
| # | Units Purchased | Price per Unit | CoG Purchased | Units Sold | Units Remaining | CoG Sold | Inventory Value |
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FIFO LIFO
What do the accountancy terms FIFO and LIFO mean? The methods FIFO (First In First Out) and LIFO (Last In First Out) define methods used to gather inventory units and determine the Cost of Goods Sold (COGS). Companies pick one of these methods based on their financial preferences. However, the profit volumes are impacted by the method selected?
How to calculate FIFO?
Consider that there is a watch manufacturing company that gets its units for the last 6 months as follows.
- January, 100 Units, $20 per unit
- February, 150 units, $20 per unit
- March 150 Units, $25 per unit
- April 100 units, $25 per unit
- May 150 units, $30 per unit
- June 150 units, $25 per unit
Consider that the Cost of Goods Sold for 250 units has to be determined using FIFO
COGS \(= (100\times20) + (150\times20)\)
Cost of Goods Sold (FIFO) \(= 2000 + 3000\)
COGS (FIFO) \(= \$5000\)
FIFO definition
FIFO (First in First Out) means that the inventory which has been received first will be sold first. In other words, an ascending order will be followed. In the above example, the cost of 250 units had to be determined. Thus, the first hundred units received in January and the remaining 150 from Feb were used.
How to calculate LIFO?
LIFO has the opposite functionality of FIFO. LIFO (Last in First Out) means that the inventory will be sold in the opposite order as it was received. In the words, the inventory which was received in the last would be used first. Consider the example mentioned above to calculate COGS using LIFO.
- January, 100 Units, $20 per unit
- February, 150 units, $20 per unit
- March 150 Units, $25 per unit
- April 100 units, $25 per unit
- May 150 units, $30 per unit
- June 150 units, $25 per unit
Here, let us calculate the cost of 250 units using LIFO. As compared to FIFO where we started in January, in the case of LIFO, we will start in December. When this concept is followed, the value of COGS will be given as follows.
COGS \(= (150\times25 ) + (100\times30)\)
COGS \(= 3750 + 3000\)
COGS (LIFO) \(= 6750\)
LIFO definition
If you have a look at the cost of COGS (LIFO), it is more than COGS (FIFO) because the order in which the units have been consumed is not the same. In this example as well, we needed to determine the COGS of 250 units. However, we started from the units which were received most recently. Hence, the first 150 units were taken from June and the remaining 100 from May.
FIFO Calculator and LIFO calculator
This high-quality FIFO and LIFO calculator actually saves the day for users because they do not need to complete so many steps. The results are attained only by filling the needed fields.
1. Inputs to be entered
You need to enter the number of units and cost for each unit. Other than that, for each inventory, select from “P” and “S” by viewing the drop-down menu.
2. Select between FIFO and LIFO
On what basis do you want the inventory to be calculated. If you want FIFO to be used, click the required button. Similarly, there is a button for LIFO as well. In accordance with the selection made, the value of COGS would be shown on the right.
Average Cost Inventory
When you talk about the Average Cost inventory, this method involves calculating the weighted average of the inventory. Consider the example used above.
- January, 100 Units, $20 per unit
- February, 150 units, $20 per unit
- March 150 Units, $25 per unit
- April 100 units, $25 per unit
- May 150 units, $30 per unit
- June 150 units, $25 per unit
The total cost of all units \(= \$19500\)
Total units \(= 800\)
Thus, the average cost of one unit \(= \dfrac{19500}{800}\)
Average Per-Unit cost \(= \$24.37\)
Hence, if want to determine the cost of 100 units, simply multiply the average per-unit cost with it.
Cost of 100 units \(= 100 \times 24.37\)
Cost of 100 units \(= \$2437\)
There is another type of inventory which is called ending inventory. It is the actual amount of products that are available for sale at the end of an auditing period.
Also, the number of inventory units remains the same at the last of that period. And to calculate the ending inventory, the new purchases are added to it, minus the exact cost of goods sold. This will provide the final result and if you want to calculate it within a single click, use the ending inventory calculator.
Specific Inventory Tracking
The concept of specific inventory comes into play when you are dealing with an inventory with units of different features. Consider the following example.
A company manufacturing automobiles deals in manual cards, automatic cards and hybrid cars. Thus, these variants cannot be used as the same inventory. If the company gets an order that it requires 100 units, a specification of the variant would have to be attained. As the product variants vary in terms of features and specifications, they have to be tracked individually.
References:
- Inventory Valuation — LIFO vs. FIFO. Investopedia.com
- LIFO vs FIFO for Inventory Accounting
- Business News Daily. (2020, August 28). FIFO vs LIFO: What Is the Difference?
- Wikipedia. FIFO and LIFO accounting. Wikipedia.