First-in, first-out (FIFO) cost flow: The FIFO inventory costing method assigns the first unit costs that come into a company (first-in) to the first units flowing out of the company (first-out). In this way, the cost of goods sold consists of the first unit costs existing in a period. As a result of the first unit costs being assigned to the cost of goods sold, the ending merchandise inventory consists of the last unit costs in the period.

Consider again the information shown earlier, in which a company sold 25 units of merchandise on December 6. Using the FIFO method, the cost of goods sold of the 25 units would be calculated as follows.
 

Units

Unit Cost

Total

20

$18 (from the 20 units in inventory on December 1)

$360

5

$16 (from the 30 units purchased on December 4)

$80

25

 

$440

In a similar manner, using the FIFO method the cost of goods sold of the 45 units sold on December 24 would be calculated as follows.
 

Units

Unit Cost

Total

25

$16 (from the 30 units purchased on December 4) (Remember 5 of
the 30 units purchased on December 4 were sold on December 6.)

$400

20

$15 (from the 50 units purchased on December 17)

$300

45

 

$700

Based on the above calculations, the FIFO method would result in December's cost of goods sold for 70 units being $1,140.
 

Date

Units

Cost

December 6

25

$440

December 24

45

$700

Totals

70

$1,140

Using the FIFO method, the cost of the company's 30 units of merchandise inventory on hand on December 31 would be calculated as follows.
 

Units

Unit Cost

Total

30

$15 (from the 50 units purchased on December 17) (Remember 20 of
the 50 units purchased on December 17 were sold on December 24.)

$450

The $450 cost of the December 31 merchandise inventory is reasonable because if the FIFO method assigns the first unit costs that come into a company (first-in) to the first units flowing out of the company (first-out), the ending inventory units (those units that did not flow out) must be assigned the costs of the last units flowing into the company.

One of the helpful characteristics of inventory costing is that the reasonableness of the cost of goods sold and ending inventory calculations can be checked by using the summary of the components of merchandise inventory presented earlier in this chapter.
 

Beginning merchandise inventory

$360

Plus: purchases ($480 + $750)

$1,230

Less: purchases returns

$0

Merchandise available for sale

$1,590

Less: cost of goods sold

$1,140

Ending merchandise inventory

$450

Notice in the above inventory components summary, once the company's cost of goods sold is determined, the cost of its ending merchandise inventory can be calculated by subtraction. Since this $450 cost of ending merchandise inventory agrees with the $450 cost calculated earlier in the paragraphs above, we can have confidence in our FIFO method calculations.

The complete FIFO inventory cost flows can be seen as follows.
 

Merchandise Inventory: FIFO

December 1 Inventory

20 @ $18 = $360

 

 

December 4 Purchase

30 @ $16 = $480

 

 

 

 

20 @ $18 = $360
5 @ $16 = $80
Total =$440

December 6 
Cost of Good Sold

December 17 Purchase

50 @ $15 = $750

 

 

 

 

25 @ $16 = $400
20 @ $15 = $300
Total =$700

December 24 
Cost of Good Sold

December 30 Inventory

30 @ $15 = $450

 

 

Practice Exercise

The Christopher Corporation began its October operations with 30 units in inventory. Each unit cost the company $10. On October 7, the company purchased 120 more units at a cost of $11 each. The company sold 80 units on October 12 at a price of $23 each.

1. Using the FIFO inventory method, determine the cost of the 80 units sold by the Christopher Corporation on October 12.
 

Units

Unit Cost

Total

30

$10 (from the 30 units in inventory on October 1)

$300

50

$11 (from the 120 units purchased on October 7)

$550

80

 

$850

2. Determine the cost of the Christopher Corporation's October 12 ending merchandise inventory of 70 units.
 

Units

Unit Cost

Total

70

$11 (from the 120 units purchased on October 7) 
(Remember, 50 of the 120 units were sold on October 12.)

$770

The Christopher Corporation's ending inventory cost can be verified by using the relationship among merchandise available for sale, the cost of goods sold, and ending inventory, as shown below.
 

Beginning merchandise inventory

$300

(30 units x $10 each)

Plus: purchases

$1,320

(120 units x $11 each)

Merchandise available for sale

$1,620

 

Less: cost of goods sold

$850

(calculated above)

Ending merchandise inventory

$770

 

3. Determine the Christopher Corporation's October gross profit.
 

Sales

$1,840

(80 units at $23 each)

Cost of Goods Sold

$850

(calculated above)

Gross Profit

$990

 

** You now have the background to do text exercise 8.11.

 

 

Previous section

Next section