Companies that utilize inventory must record the usage of that inventory towards end product.
Oftentimes, you’ll be given a situation like the following…
Question: Hats LLC, the most popular company for sick hats at Crammer Nation University, made the following inventory purchases during March 2022.
|Dec 1||Beginning inventory||10||$10||$100|
Over the course of December, Hats LLC sold 30 units for $20 each.
…and asked to determine how the company should record the usage of this inventory towards end-product in the Cost of Goods Sold account.
To cost out this inventory towards Cost of Goods Sold, we’ll use either of the following 3 methods:
- Weighted-average cost
Let’s go through each method and see how they’d look!
First-In-First-Out (FIFO) means that you’ll associate the cost of goods sold to the first, or oldest, units in the inventory.