10 November 2015
FIFO (First-in, first out) This method assumes that the goods that arrive first are the first to be used. It is only an assumption: apart from their price all goods of a given type are identical and therefore you don’t know, or care, how they are physically used.
So, in the above case, all 800 units sold would be assumed to be those delivered on 12 March. They would have a cost of 800 x $5 = $4,000 and the value of the inventory remaining would be 200 x $5 + 500 x $6 = $4,000.
Note that receipts and sales are handled on a strict time basis.
LIFO (Last-in, first out) This method assumes that the goods that arrive last are the first to be used. As before It is only an assumption: apart from their price all goods of a given type are identical and therefore you don’t know, or care, how they are physically used.
So, in the above case, the 800 units sold would be assumed to be all 500 of those delivered on 21 March plus 300 from the March 12 delivery. They would have a cost of 500 x $6 plus 300 x $5 = $4,500, and the value of the inventory remaining would be 700 x $5 = $3,500.
Note that receipts and sales are handled on a strict time basis.
Cumulative weighted average Every time units are added, a new average price is calculated. Any time goods are removed they are removed at the prevailing average.
12 March 20X4: buy 1000 units at $5 each
21 March 20X4: buy 500 units at $6 each
31 March 20×4: sell 800 units at $12 each. Cumulative weighted average
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