Under first-in, first-out (FIFO) method, the costs are chronologically charged to cost of goods sold (COGS) i.e., the first costs incurred are first costs charged to cost of goods sold (COGS). This article explains the use of first-in, first-out (FIFO) method in a periodic inventory system. If you want to read about its use in a perpetual inventory system, read “first-in, first-out (FIFO) method in perpetual inventory system” article.

In a periodic inventory system when a sale is made, the entry to record the cost of goods sold is not made. At the end of accounting period, the quantity of inventory on hand (ending inventory) is found by a physical count and if the FIFO method is used to compute the cost of ending inventory, the cost of most recent purchases are used. Once the cost of ending inventory has been computed, the cost of goods sold can be computed easily using the following formula:

Cost of goods sold (COGS) = (Beginning inventory + Purchases) – Ending inventory

The following example illustrates the use of FIFO method in a periodic inventory system:

Example:

The Sunshine company uses periodic inventory system. The company makes a physical count at the end of each accounting period to find the number of units in ending inventory. The company then applies first-in, first-out (FIFO) method to compute the cost of ending inventory.

The information about the inventory balance at the beginning and purchases made during the year 2012 are given below:

Mar. 01 Beginning balance: 400 units @ $18 per unit $7,200
Mar. 12 Purchases: 600 units @ $20 per unit $12,000
Oct. 17 Purchases: 800 units @ $22 per unit $17600
Dec. 15 Purchases: 200 units @ $24 per unit $4,800
———— ———-
Available during the year 2012 2,000 units $41,600
———— ———-

On 31st December 2012, 600 units are on hand according to physical count.

Required: Compute the following using first-in, first-out (FIFO) method:

  1. Cost of ending inventory at 31 December 2012.
  2. Cost of goods sold during the year 2012.

Solution:

(1). Cost of ending inventory – FIFO method:

If FIFO method is used, the units remaining in the inventory represent the most recent costs incurred to purchase the inventory. The cost of 600 units on 31 December would, therefore, be computed as follows:

Cost of 200 units purchased on 15 December 2012 200 × $24 = $4,800
Cost of 400 units purchased on 17 October 2012 400 × $22 = $8,800
———
Cost of 600 units on hand on 31 December 2012 $13,600
———

 (2). Cost of goods sold – FIFO method:

Beginning inventory $7,200
Purchase during the year ($12,000 + $17,600 + $4,800) $34,400
———-
Cost of goods available for sale during the year $41,600
Less ending inventory (computed above) $13,600
———-
Cost of goods sold $28,000
———-

The periodic inventory and FIFO concepts can also be applied for recording and valuing direct materials in manufacturing companies. To understand their use in a manufacturing company, consider the following example:

Example:

The Galaxy manufacturing company has provided the following information about beginning balance and purchases of direct material for the year 2013:

01 Jan. Beginning balance: 2800 pounds @ $9.20 per pound
15 Apr. Purchases: 2,000 pound @ $9.50 per pound
20 Aug. Purchases: 2,500 pound @ $9.80 per pound
15 Nov. Purchases: 1,000 pound @ $10.20 per pound

At the end of the year 2013, the company makes a physical measure of material and finds that 1,700 pound of material is on hand.

Required:

  1. Compute the cost of materials on hand at the end of the year.
  2. Also compute the cost of materials issued to production during the year.

(1). Cost of materials on hand at the end of the year  – FIFO method:

Most recent costs: 1,000 pounds × $10.20 = $10,200
Next most recent costs: 700 pounds × $9.80 = $6,860
———-
Cost of 1,700 pounds of materials on hand at the end of the year $17,060
———-

(2). Cost of materials issued for production during the year – FIFO method:

Beginning balance 2,800 pounds × $9.20 = $25,760
Add materials purchased during the year:
     15 April 2,000 pound × $9.50 = $19,000
     20 August 1,800 pound × $9.80 = $17,640 $36,640
———– ———–
Cost of materials issued for production $62,400
———–

Alternatively;

Beginning balance 2,800 pounds × $9.20 = $25,760
Add materials purchased during the year:
     15 April 2,000 pound × $9.50 = $19,000
     20 August 2,500 pound × $9.80 = $24,500
     15 November 1,000 pound × $10.20 = $10,200 $53,700
———– ———–
Cost of materials available for use during the year $79,460
Less cost of materials on hand at the end of the year $17,060
———–
Cost of materials issued for production $62,400
———–
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