Inventory methods are used to calculate the cost of sales, at the cost it was bought at (as inventories are bought in different time periods and typically at different costs).
FIFO First In First Out
This method works through the inventory items (and the cost they came in as), with the oldest inventory items first.
LIFO Last In First Out
This method works through the inventory, with the newest inventory items first out.
AVCO – Average costing
Takes the average cost of the inventory items (over the volume of items) and costs the inventory usage at that cost.
Examples
| Quantity | Cost (Per Item) | FIFO | LIFO | AVCO |
1st Jan | 100 | 5 | 500 | | 500 |
1st Feb | 200 | 2 | 400 | 400 | 400 |
1st Mar | 100 | 3 | | 300 | 300 |
| | | | | 3 |
| Purchased | Cost of sales | Gross Profit | ||
FIFO | 300 | 900 | 600 | ||
LIFO | 300 | 700 | 800 | ||
AVCO | 300 | 900 | 600 |
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