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:
1 year ago
Last edited at 4:11AM on 7/21/2012
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.
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.
Actually it also depends on the nature of the properties of the commodities in inventory, shelf life and so on, I think you can see where I'm going with this,so on different levels it is very beneficial to apply FIFO to the system..