Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC Advanced Accounting Level Notes: Inventory valuation: Inventory valuation methods: First In First Out (FIFO): Example Question
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- This is a solution to the question found here
- To learn more about the FIFO inventory valuation method click here
- You can learn more about inventory valuation methods here
The Solution
- Under FIFO it is assumed the first items bought are sold first
| Date | Receipts | Sales | Balance | ||||||
| Units | Unit Cost ($) | Total Cost($) | Units | Unit Cost($) | Total Cost($) | Units | Unit Cost ($) | Total Cost($) | |
| Op/Bal | 50 | 30.00 | 1 500 | ||||||
| Jan 8 | 30 | 30.00 | 900 | 20 | 30.00 | 600 | |||
| Jan 10 | 100 | 30.00 | 3 000 | 120 | 30.00 | 3 600 | |||
| Jan 12 | 80 | 30.00 | 2 400 | 40 | 30.00 | 1 200 | |||
| Jan 21 | 120 | 30.50 | 40 | 30.00 | 1 200 | ||||
| 120 | 30.50 | 3 660 |
|||||||
| 4 860 | |||||||||
| Jan 28 | 40 | 30.00 | 1 200 | 70 | 30.50 | 2 135 | |||
50 | 30.50 | 50 | - | - | - |
||||
| 90 | 1 525 | 70 | 2 135 | ||||||
| Feb 1 | 50 | 30.50 | 1 525 | 20 | 30.50 | 610 | |||
| Feb 14 | 150 | 31.00 | 4 650 | 20 | 30.50 | 610 | |||
150 | 31.00 | 4 650 |
|||||||
| 170 | 5 260 | ||||||||
| Feb 23 | 20 | 30.50 | 610 | 70 | 31.00 | 2 170 | |||
80 | 31.00 | 2 480 | - | - | - |
||||
| 100 | 3 090 | 70 | 2 170 | ||||||
| Mar 1 | 30 | 31.00 | 930 | 40 | 31.00 | 860 | |||
| Mar 4 | 120 | 31.50 | 3 780 | 40 | 31.00 | 860 | |||
120 | 31.50 | 3 780 |
|||||||
| 160 | 4 640 | ||||||||
| Mar 19 | 40 | 31.00 | 860 | 40 | 31.50 | 1 260 | |||
80 | 31.50 | 2 520 | - | - | - |
||||
| 120 | 3 380 | 40 | 1 260 | ||||||
| Mar 23 | 100 | 32.00 | 3 200 | 40 | 31.50 | 1 260 | |||
100 | 32.00 | 3 200 |
|||||||
| 140 | 4 460 | ||||||||
| Mar 27 | 40 | 31.50 | 1 260 | 20 | 32.00 | 640 | |||
80 | 32.00 | 2 560 | - | - | - |
||||
| 120 | 3 820 | 20 | 640 | ||||||
- Since these are the only transactions that took place according to the question
- On 31 March 20×8 the inventory balance would be:
- 20 units @ $32 per unit this translates to:
- $640
- Here we have shown detailed workings so that you can have a better picture of how we have arrived at the final figure
- Unless the number of marks allocated or the question dictates that you do this you should use a simpler method:
- Add all the units all the items bought(including opening inventory) in the period in this case: (100+120+150+120+100)= 640
- Add all the units that were sold or issued (30+80+90+50+100+30+120+120)=620
- Subtract issues/sales from total inventory available during the period i.e. 640-620
- Now multiply this by the latest purchase price i.e 20×32=640
- NB If the closing inventory in units is more than the last batch bought then the inventory then you need to use the previous price points until the balance is satisified
- For example let’s say in this case the balance had been 200 units instead
- Then the cost of closing inventory would be:
- (100×32.00)+(100×31.5)=6 350
- NB When inventory is being used up instead of being sold then the word Sales in the workings table is replaced by the word Issues
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