5.3 First In First Out Method FIFO
The FIFO Method¶
FIFO assumes that the oldest inventory items are sold or used first. This means that the cost of the earliest purchased items is assigned to the first items sold or issued. While this might reflect the actual physical flow of goods in some cases (like perishable goods), it's an assumption used for accounting purposes.
Example: Perpetual Inventory with FIFO¶
Let's continue with the example of a manufacturing company purchasing and issuing a component. Here's a summary of the purchases:
- Jan 1: 500 units @ ₹200 and 400 of these were issued.
- Feb 1: 600 units @ ₹230 and 500 of these were issued.
- Mar 1: 800 units @ ₹210 and 900 of these were issued.
- Apr 1: 1000 units @ ₹180 and 800 of these were issued.
- May 1: 700 units @ ₹220 and 500 of these were issued.
- Jun 1: 400 units @ ₹250 and 600 of these were issued.
Here's how the issues and balances are calculated using FIFO:
| Date | Transaction | Units | Rate (₹) | Value (₹) | Balance Units | Balance Rate (₹) | Balance Value (₹) |
|---|---|---|---|---|---|---|---|
| Jan 1 | Purchase | 500 | 200 | 100,000 | 500 | 200 | 100,000 |
| Jan 15 | Issue | 400 | 200 | 80,000 | 100 | 200 | 20,000 |
| Feb 1 | Purchase | 600 | 230 | 138,000 | 100 @ 200 600 @ 230 |
200 230 |
20,000 138,000 = 158,000 |
| Feb 15 | Issue | 500 | 100 @ 200 400 @ 230 |
112,000 | 200 | 230 | 46,000 |
| Mar 1 | Purchase | 800 | 210 | 168,000 | 200 @ 230 800 @ 210 |
230 210 |
46,000 168,000 = 214,000 |
| Mar 15 | Issue | 900 | 200 @ 230 700 @ 210 |
193,000 | 100 | 210 | 21,000 |
| Apr 1 | Purchase | 1000 | 180 | 180,000 | 100 @ 210 1000 @ 180 |
210 180 |
21,000 180,000 = 201,000 |
| Apr 15 | Issue | 800 | 100 @ 210 700 @ 180 |
147,000 | 300 | 180 | 54,000 |
| May 1 | Purchase | 700 | 220 | 154,000 | 300 @ 180 700 @ 220 |
180 220 |
54,000 154,000 = 208,000 |
| May 15 | Issue | 500 | 300 @ 180 200 @ 220 |
98,000 | 500 | 220 | 110,000 |
| Jun 1 | Purchase | 400 | 250 | 100,000 | 500 @ 220 400 @ 250 |
220 250 |
110,000 100,000 = 210,000 |
| Jun 15 | Issue | 600 | 500 @ 220 100 @ 250 |
135,000 | 300 | 250 | 75,000 |
Here at the time of issue, we first issue the balance from previous lot and then utilise the current lot.
Summary:
- Total Purchases: ₹840,000
- Total Issues (Material Consumption): ₹765,000
- Ending Inventory Value: ₹75,000
Perpetual vs. Periodic FIFO¶
The example above demonstrates perpetual FIFO, where COGS is calculated with each sale. Periodic FIFO calculates COGS only at the end of the period. The ending inventory value will be the same under both methods, but the COGS and gross profit figures can differ slightly if sales occur throughout the period at different prices.
In summary, FIFO is a widely used and generally accepted inventory valuation method, particularly suitable when inventory turns over quickly or when prices are relatively stable.