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Monday 18 July 2011

Management Accountancy : Inventory methods


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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