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