What is the FIFO Method?
FIFO (First-In, First-Out) is an inventory valuation method that assumes the oldest units purchased are the first ones sold. It's widely used because it mirrors how many businesses actually move physical stock, and it affects both Cost of Goods Sold and ending inventory value.
Under FIFO, the cost of goods sold is based on the oldest inventory costs first, while ending inventory reflects the most recent purchase costs.
- •Oldest inventory costs are expensed first
- •Ending inventory = most recent (higher) costs
- •Higher reported profit in inflation
- •Matches physical flow for perishables
- •Newest inventory costs are expensed first
- •Ending inventory = oldest (lower) costs
- •Lower reported profit in inflation
- •Not permitted under IFRS
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Step-by-step worked examples
A shop's inventory: 100 units bought at $8 (Jan), then 150 units at $10 (Feb). It sells 120 units in March. Under FIFO, what is COGS?
First 100 units come from the Jan batch: 100 × $8 = $800 Remaining 20 units come from the Feb batch: 20 × $10 = $200 COGS = 800 + 200 = $1,000
Using the same purchases (100 @ $8, 150 @ $10), find the ending inventory value after selling 120 units under FIFO.
Units sold (120) fully use the 100-unit Jan batch and 20 units of the Feb batch Remaining units = 150 − 20 = 130 units, all from the Feb batch at $10 Ending inventory = 130 × 10 = $1,300
A store bought 50 units at $20 in Week 1 and sells all 50 units in Week 2 with no new purchases. What is FIFO COGS?
All 50 units sold come from the only batch available COGS = 50 × $20 = $1,000
Flashcards
Quick quiz
Q1.FIFO assumes that…
Q2.100 units bought at $5, then 50 at $7. If 120 units are sold under FIFO, what is COGS?
Q3.During rising prices, FIFO generally results in…
Q4.Under FIFO, ending inventory is valued using…
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Common mistakes
Assuming FIFO means the newest costs are used for COGS. — Correct: It's the opposite — FIFO expenses the OLDEST costs first.
Forgetting to track separate cost layers (batches). — Correct: FIFO requires tracking each purchase batch's quantity and unit cost separately.
Using FIFO and LIFO interchangeably. — Correct: They produce different COGS and ending inventory, especially when prices change over time.
Thinking FIFO tracks physical units, not just costs. — Correct: FIFO is a costing assumption — it doesn't have to match which physical units actually left the warehouse.
FAQ
What is the FIFO method?
FIFO (First-In, First-Out) is an inventory costing method where the oldest purchase costs are assigned to units sold first.
What is the FIFO formula?
COGS under FIFO = units sold × unit cost of the oldest available inventory layer(s), consumed in purchase order.
What are some FIFO examples?
A grocery store selling older milk cartons first, or a retailer whose COGS is calculated using the earliest purchase prices.
How do you calculate FIFO COGS and ending inventory?
List purchases in order, assign the oldest cost layers to units sold for COGS, and value remaining units using the newest cost layers for ending inventory.