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What is FIFO costing

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Here is how inventory cost is calculated using the FIFO method:
Assume a product is made in three batches during the year. The costs and quantity of each batch are
:Batch 1: Quantity 2,000 pieces, Cost to produce \$8000
Batch 2: Quantity 1500 pieces, Cost to produce \$7000
Batch 3: Quantity 1700 pieces, Cost to produce \$7700

Let's say you sold 4000 units during the year, out of the 5200 produced.
Then calculate the unit costs for each batch:

Batch 1: 8000/2000 = 4
Batch 2: 7000/1500 = 4.667
Batch 3: 7700/1700 = 4.529

So, of the 4000 units sold, using FIFO

The first 2000 units sold from the first batch cost \$4 per unit.
The next 1500 units sold from the second batch cost \$4.667 per unit.
And the last 500 units sold from the third batch cost \$4.529.

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First In First Out... The accounting method is used to determine which items in inventory are theoretically used first. Older items typically cost less than newer ones, so "using" the older items first tends to keep reported costs down (and the value of inventory up). There is no requirement that the actual items used be the oldest. This is just for book keeping purposes.

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FIFO costing is an inventory method that assumes the first items to be placed should be the ones to be sold first. The costing method ensures that the inventory is up to date with the correct number of items in the order that they appear. Find out more details at http://www.accounting4management.com/fifo_method_of_materials_costing.htm.

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First in First out is also a method used to designate which mutual funds you are selling. You can use a cost averaging method to determine the basis of the mutual funds you are sellig or the FIFO method.