Calculating Inventory Costs by Using FIFO Method (Example & Formula)




FIFO can be used to calculate the cost of inventory of a firm. Moreover it is another technique to calculate the cost of goods sold of a firm’s inventory. In order to calculate the cost of inventory with FIFIO let us assume that a product is produced in three different batches each year. Now assume the cost and the quantity of the products produced in each batch as follows:-

Quantity Produced
Cost of Production
Batch 1
2000 pieces
$8000
Batch 2
1500 pieces
$7000
Batch 3
1700 pieces
$7700

Total Number of produced units = 5200 units
Now suppose that the company sold 4000 units in a year from the total 5200 units produced by the company. Let’s find out the unit cost of each item produced in each batch
Unit Cost of Batch 1 = Total Cost/ Total number of units produced in the batch
Unit Cost of Batch 1 = 8000/2000
Unit Cost of Batch 1= $4
Unit cost of batch 2= 7000/1500
Unit cost of batch 2 = $4.667
Unit cost of batch 3= 7700/1700
Unit cost of batch 3=$4.529
So the cost of inventory using FIFO can be calculated as under:-
The first 2000 units sold from the first batch are sold at a price of $4 per unit
The next 1500 units sold from the batch 2 are sold at the price of $4.667 per unit
The last 500 units sold form the batch 3 are sold at the price of $4.529
The number of remaining units left in the inventory = 1700 – 500
                                                                                                1200 units
The cost of these 1200 units will be $4.529 per unit and the sale of these units will start off at the beginning of the next fiscal year.
The cost of the ending inventory by this method will be as under:-
Cost of ending inventory = 1200 x 4.529
Cost of ending inventory = $5,434.8


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Calculating Inventory Balance with the help of FIFO




Marinating and balancing the inventory is one of the most important tasks of the firm’s operation. Inventory of a firm is directly related to the net sales of a company which is directly related to the revenue of the company. A company must maintain and balance its inventory to enjoy greater rate of return and profit over the cost. We can calculate the balance of inventory with the help of FIFO calculation. There are four steps involved in calculating the balance of the inventory with FIFO. These steps are explained as under:-

Step Number 1
In this step a firm needs to review its inventory in order to find out the number of products purchased each year. The firm must compile a complete list of products produced, the quantity of products that is purchased and the amounts of cash involved in purchase including the date of purchase. 

Step Number 2
In this step the company will review its sale record to find out the particular product that is sold in that period. The company will also quantity of products sold each year. 

Step Number 3
In this step the company must tally the purchase price of the inventory. Suppose a company purchases 1000 units of a product in the month of March at the rate of $1 per unit the total purchase price of the units will be $1000. Then again the company purchases 2000 units of the products at the price of $1.25 per unit in April and the total purchase price will be $25, 00. The company purchases 1500 units of products in May at the rate of $1.50 per unit at the total price of $2,250. In total the company has purchased 45, 00 units of the product at a total price of $5,750. Suppose the company sold 3000 units and the units left in the inventory are 1000. 

Step Number 4
In this step we will calculate FIFO by assuming that the goods purchased in the month of March and April are completely sold. Suppose that out of 1500 units purchased in May, 500 units are also sold along with other units. Now in order to calculate the inventory balancing amount multiple the number of remaining units with the purchase price of the units in purchased in May. There were 1000 products left multiplying 1000 with 1.50 will return us with inventory balancing value of $15, 00.

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