How to Calculate Fifo in Accounting

FIFO (First-In, First-Out) is an inventory valuation method used in accounting to determine the cost of goods sold (COGS) and ending inventory. This guide explains how to calculate FIFO, provides a step-by-step example, and compares it to other inventory methods.

What is FIFO in Accounting?

FIFO is one of the three primary inventory valuation methods used by businesses to determine the cost of goods available for sale and the cost of goods sold. The FIFO method assumes that the first items purchased or manufactured are the first ones sold.

Under FIFO, inventory is tracked on a first-in, first-out basis. When goods are sold, the cost of the oldest inventory is used to calculate the cost of goods sold. The remaining inventory is valued at the cost of the most recent purchases.

Key Principle: The oldest inventory items are sold first, and the most recent purchases are the last to be sold.

How to Calculate FIFO

Calculating FIFO involves tracking inventory purchases and sales in chronological order. Here's the step-by-step process:

Record all inventory purchases with their cost and date.
Record all inventory sales with their quantity and date.
Match sales to the oldest inventory purchases first.
Calculate the cost of goods sold by multiplying the quantity sold by the cost of the oldest inventory.
Determine the ending inventory by subtracting the total quantity sold from the total quantity purchased.

FIFO Formula:

Cost of Goods Sold (COGS) = (Quantity Sold × Cost of Oldest Inventory)

Ending Inventory = Total Purchases - Total Sales

Example Calculation

Let's walk through a FIFO calculation example to illustrate how the method works.

Scenario

A company has the following inventory transactions:

Date	Transaction	Quantity	Cost per Unit
Jan 1	Purchase	100	$10
Jan 15	Purchase	50	$12
Feb 1	Sale	75	-
Feb 15	Sale	30	-

Step-by-Step Calculation

First, list all transactions in chronological order.
Calculate the cost of goods sold by matching sales to the oldest inventory first:
- First sale (75 units): All from the first purchase (100 units at $10 each). COGS = 75 × $10 = $750.
- Second sale (30 units): From the remaining 25 units of the first purchase and 5 units of the second purchase. COGS = (25 × $10) + (5 × $12) = $250 + $60 = $310.
Total COGS = $750 + $310 = $1,060.
Ending inventory: (100 + 50) - (75 + 30) = 150 - 105 = 45 units at $12 each.

Results

Total Cost of Goods Sold: $1,060

Ending Inventory: 45 units at $12 each

FIFO vs. LIFO

FIFO and LIFO (Last-In, First-Out) are the two most common inventory valuation methods. Here's how they compare:

Aspect	FIFO	LIFO
Valuation Principle	Oldest inventory is sold first	Newest inventory is sold first
COGS Calculation	Uses the cost of the oldest inventory	Uses the cost of the newest inventory
Tax Implications	Generally results in higher COGS and lower taxable income	Generally results in lower COGS and higher taxable income
Use Cases	Common in retail and consumer goods industries	Common in manufacturing and production industries

Both methods have their advantages and disadvantages, and the choice between FIFO and LIFO depends on the specific needs of the business and the industry regulations.

FAQ

What is the FIFO method in accounting?

The FIFO method is an inventory valuation approach that values inventory based on the cost of the oldest items purchased or manufactured first. It assumes that the first items purchased are the first ones sold.

How do you calculate FIFO?

To calculate FIFO, track inventory purchases and sales in chronological order. Match sales to the oldest inventory first, then calculate the cost of goods sold and ending inventory.

What is the difference between FIFO and LIFO?

FIFO values inventory based on the oldest items first, while LIFO values inventory based on the newest items first. FIFO generally results in higher COGS and lower taxable income, while LIFO generally results in lower COGS and higher taxable income.

When should a company use FIFO?

Companies should use FIFO when they want to match the cost of goods sold to the oldest inventory, which is common in retail and consumer goods industries. It's also required by some tax authorities.

Can FIFO be used for all types of inventory?

Yes, FIFO can be used for all types of inventory, including raw materials, work-in-progress, and finished goods. However, the specific implementation may vary depending on the nature of the inventory.