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LIFO (last in, first out)

. We assume that components used formed part of the most recent 

 

delivery, and inventories are the oldest receipts. 

 

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CHAPTER 7  

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  INVENTORY 

 

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If you are preparing financial accounts you would normally expect to use FIFO or AVCO for the valuation 

of inventory. IAS 2 

Inventories does not permit the use of LIFO (para. IN13). Furthermore, you should 

note that terms such as AVCO and FIFO refer to pricing techniques only. The actual components can be 

used in any order. 

To illustrate FIFO and AVCO, the following transactions will be used in each case. 

TRANSACTIONS DURING MAY 20X7 

 

 

 

 

Market value per unit on 

 

Quantity 

Unit cost 

Total cost 

date of transactions 

 

Units 

$ 

$ 

$ 

Opening balance 1 May 

100 

2.00 

 200 

 

Receipts 3 May 

400 

2.10 

 840 

 2.11 

Issues 4 May 

200 

 

 

 2.11 

Receipts 9 May 

300 

2.12 

 636 

 2.15 

Issues 11 May 

400 

 

 

 2.20 

Receipts 18 May 

100 

2.40 

 240 

 2.35 

Issues 20 May 

100 

 

 

 2.35 

Closing balance 31 May 

200 

 

           

 2.38 

 

 

 

 1,916 

 

Receipts mean goods are received into store and issues represent the issue of goods from store. The 

problem is to put a valuation on the following. 

(a) 

The issues of materials 

(b) 

The closing inventory 

How would issues and closing inventory be valued using FIFO and AVCO? 

4.4 FIFO  

FIFO assumes that materials are issued out of inventory in the order in which they were delivered into 

inventory, ie issues are priced at the cost of the earliest delivery remaining in inventory. 

The cost of issues and closing inventory value in the example, using FIFO, would be as follows. 

 

Date of issue 

 

Quantity 

 

Value issued 

 

Cost of issues 

 

 

Units 

 

   

 

    $ 

 

$      

4 May 

 

200 

 

100 OI* at $2 

 

200 

 

 

 

 

100 at $2.10 

 

210 

 

 

 

 

 

 

410 

11 May 

 

400 

 

300 at $2.10 

 

630 

 

 

 

 

100 at $2.12 

 

212 

 

 

 

 

 

 

842 

20 May 

 

100 

 

100 at $2.12 

 

 

   212 

 

 

 

 

 

1,464 

Closing inventory value 

 

200 

 

100 at $2.12 

 

212 

 

 

 

 

100 at $2.40 

 

240 

 

 

 

 

 

 

   452 

 

 

 

 

 

1,916 

* OI = opening inventory 

Note that the cost of materials issued plus the value of closing inventory equals the cost of purchases 

plus the value of opening inventory ($1,916). 

4.5 AVCO  

There are various ways in which average costs may be used in pricing inventory issues. The most 

common (cumulative or continuous weighted average pricing) is illustrated below. 

The cumulative or continuous weighted average costing method calculates a weighted average cost for 

all units in inventory. Issues are priced at this average cost, and the balance of inventory remaining 

would have the same unit valuation. 

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PART D: RECORDING TRANSACTIONS AND EVENTS 

 

120

 

A new weighted average cost is calculated whenever a new delivery of materials into store is received. 

This is the key feature of cumulative weighted average costing.  

In our example, issue costs and closing inventory values would be as follows. 

 

 

 

 

Total inventory

 

 

Date 

Received  Issued 

Balance 

value 

Unit cost   Cost of issue

 

Units 

Units 

Units 

$ 

$ 

$ 

Opening inventory 

 

 

100 

  200 

  2.00 

 

3 May 

400 

 

 

    840 

  2.10 

 

 

 

 

500 

  1,040 

  2.08 * 

 

4 May 

 

200 

 

   (416) 

  2.08 ** 

  416 

 

 

 

300 

  624 

  2.08 

 

9 May 

300 

 

 

    636 

  2.12 

 

 

 

 

600 

  1,260 

  2.10 * 

 

11 May 

 

400 

 

   (840) 

  2.10 ** 

  840 

 

 

 

200 

  420 

  2.10 

 

18 May 

100 

 

 

    240 

  2.40 

 

 

 

 

300 

  660 

  2.20 * 

 

20 May 

 

100 

 

   (220) 

  2.20 ** 

    220 

 

 

 

 

 

 

  1,476 

Closing inventory 

 

 

 

 

 

 

   value 

 

 

200 

  440 

  2.20 

    440 

 

 

 

 

 

 

 1,916 

* A new unit cost of inventory is calculated whenever a new receipt of materials occurs. 

** Whenever inventories are issued, the unit value of the items issued is the current weighted average 

cost per unit at the time of the issue. 

For this method too, the cost of materials issued plus the value of closing inventory equals the cost of 

purchases plus the value of opening inventory ($1,916). 

The periodic weighted average costing method is similar to the continuous weighted average costing  

method; however, the unit price is calculated at the end of the period.  

This is a simpler approach; however, it means that values are not known until the end of the period. 

In our example above in Section 4.3, the weighted average cost under the periodic method for May is: 

= Total cost/(Opening quantity + Total quantity received)  

= 1,916/(100 + 400 + 300 + 100) 

= $2.13 per unit 

This gives a valuation of 200  $2.13 = $426.00 

4.6 Inventory valuations and profit 

In the previous descriptions of FIFO and AVCO the example used raw materials as an illustration. Each 

method of valuation produced different costs both of closing inventories and also of material issues. 

Since raw material costs affect the cost of production, and the cost of production works through 

eventually into the cost of sales, it follows that different methods of inventory valuation will provide 

different profit figures. An example may help to illustrate this point. 

4.7 Example: inventory valuations and profit 

On 1 November 20X2 a company held 300 units of finished goods item No 9639 in inventory. These 

were valued at $12 each. During November 20X2 three batches of finished goods were received into 

store from the production department, as follows. 

Date 

Units received 

Production cost per unit  

10 November 

400 

$12.50 

20 November 

400 

$14 

25 November 

400 

$15 

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CHAPTER 7  

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  INVENTORY 

 

121 

Goods sold out of inventory during November were as follows. 

Date 

Units sold 

Sale price per unit 

14 November 

500 

$20 

21 November 

500 

$20 

28 November 

100 

$20 

Required 

What was the profit from selling inventory item 9639 in November 20X2, applying the following 

principles of inventory valuation? 

(a) FIFO 

(b) 

AVCO (using cumulative weighted average costing) 

Note. Ignore administration, sales and distribution costs. 

Solution

 

(a) 

FIFO  

 

 

Issue cost 

Closing 

 

 

total 

inventory 

 

 

$ 

$ 

Date 

 Issue costs 

 

 

14 November 

 300 units × $12 plus 

 

 

 

 200 units × $12.50 

 6,100 

 

21 November 

 200 units × $12.50 plus 

 

 

 

 300 units × $14 

 6,700 

 

28 November 

 100 units × $14 

 1,400 

 

Closing inventory 

 400 units × $15 

             

 6,000 

 

 

 14,200 

 6,000 

(b) 

AVCO (cumulative weighted average cost) 

 

 

 

Balance in Total cost 

Closing 

 

 

Unit cost  inventory  of issues  inventory 

 

 

$ 

$ 

$ 

$ 

1 November 

 Opening inventory      300   12.000 

  3,600 

 

 

10 November   400 

  12.500 

 5,000 

 

 

 

  700 

  12.286 

  8,600 

 

 

14 November   500 

  12.286 

 6,143 

  6,143 

 

 

  200 

  12.286 

  2,457 

 

 

20 November   400 

  14.000 

 5,600 

 

 

 

  600 

  13.428 

  8,057 

 

 

21 November   500 

  13.428 

 6,714 

  6,714 

 

 

  100 

  13.428 

  1,343 

 

 

25 November   400 

  15.000 

 6,000 

 

 

 

  500 

  14.686 

  7,343 

 

 

28 November   100 

  14.686 

 1,469 

   1,469 

           

30 November   400 

  14.686 

 5,874 

 14,326 

 5,874 

Summary: profit 

 

FIFO 

AVCO 

 

$ 

$ 

Opening inventory 

 3,600 

 3,600 

Cost of production 

 16,600 

 16,600 

 

 20,200 

 20,200 

Closing inventory 

  6,000 

  5,874 

Cost of sales 

 14,200 

 14,326 

Sales (1,100 × $20) 

 22,000 

 22,000 

Profit 

   7,800 

   7,674 

Different inventory valuations have produced different cost of sales figures, and therefore different profits. 

In our example, opening inventory values are the same, therefore the difference in the amount of profit 

under each method is the same as the difference in the valuations of closing inventory. 

The profit differences are only temporary. In our example, the opening inventory in December 20X2 will 

be $6,000 or $5,874, depending on the inventory valuation used. Different opening inventory values 

will affect the cost of sales and profits in December, so that in the long run inequalities in cost of sales 

each month will even themselves out. 

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