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.
| Date | Transaction | Units | Cost | Total Cost |
|---|---|---|---|---|
| Dec 1 | Beginning inventory | 10 | $10 | $100 |
| Dec 5 | Purchase | 5 | $8 | $40 |
| Dec 10 | Purchase | 15 | $6 | $90 |
| Dec 18 | Purchase | 20 | $5 | $70 |
| Total | $300 |
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:
- FIFO
- LIFO
- Weighted-average cost
Let’s go through each method and see how they’d look!
FIFO
First-In-First-Out (FIFO) means that you’ll associate the cost of goods sold to the first, or oldest, units in the inventory.
We first need to make note of how many units were sold…
Question: Hats LLC, the most popular company for sick hats at Crammer Nation University, made the following inventory purchases during March 2022.
| Date | Transaction | Units | Cost | Total Cost |
|---|---|---|---|---|
| Dec 1 | Beginning inventory | 10 | $10 | $100 |
| Dec 5 | Purchase | 5 | $8 | $40 |
| Dec 10 | Purchase | 15 | $6 | $90 |
| Dec 18 | Purchase | 20 | $5 | $70 |
| Total | $300 |
Over the course of December, Hats LLC sold 30 units for $20 each.
…and then go purchase-by-purchase (in chronological order) to assign costs to each of those units sold!
Let’s start with the first (a.k.a. oldest) purchase of inventory. When did that occur?
On Dec 1, where we assigned our beginning inventory of 10 units for $10 each.
| Date | Transaction | Units | Cost | Total Cost |
|---|---|---|---|---|
| Dec 1 | Beginning inventory | 10 | $10 | $100 |
| Dec 5 | Purchase | 5 | $8 | $40 |
| Dec 10 | Purchase | 15 | $6 | $90 |
| Dec 18 | Purchase | 20 | $5 | $70 |
| Total | $300 |
We’re going to cost these 10 units towards our 30 units sold in December…
Cost of Goods Sold = $10 x 10 units (Dec 1)...
…resulting in 20 units left to assign a cost to.
What’s the next oldest purchase of inventory?
On Dec 5, we purchased 5 units for $8 each.
| Date | Transaction | Units | Cost | Total Cost |
|---|---|---|---|---|
| Dec 1 | Beginning inventory | 10 | $10 | $100 |
| Dec 5 | Purchase | 5 | $8 | $40 |
| Dec 10 | Purchase | 15 | $6 | $90 |
| Dec 18 | Purchase | 20 | $5 | $70 |
| Total | $300 |
We’re going to cost these 5 units towards our remaining 20 units to assign a cost to…
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