Discuss the FIFO price method of costing of stock issued and valuation of stock in hand.
Discuss the FIFO price method of costing of stock issued and valuation of stock in hand.
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Discuss the FIFO price method of costing of stock issued and valuation of stock in hand.
FIFO (First-In, First-Out) is a method of inventory valuation commonly used in accounting and inventory management. Under the FIFO method, the cost of inventory is assumed to be consumed in the order in which it was acquired. This means that the earliest (oldest) inventory purchases are considered to be the first ones sold or used, while the most recent (newest) inventory purchases remain in stock.
Costing of Stock Issued:
When inventory is issued or sold under the FIFO method, the cost of goods sold (COGS) is calculated based on the cost of the oldest inventory available in stock. The cost assigned to the goods sold is the cost of the earliest inventory purchases. This reflects the assumption that the inventory sold first is from the earliest purchases made by the business.
Valuation of Stock in Hand:
For valuing the stock remaining in inventory, the FIFO method assumes that the most recent purchases remain unsold, while older inventory remains in stock. Therefore, the value of the remaining inventory is based on the cost of the most recent purchases, as these are the items that have not yet been sold.
Example:
Let's consider an example to illustrate the FIFO method:
Now, if the company sells 200 units of the product on April 1, according to the FIFO method:
Using FIFO:
In summary, the FIFO method assumes that inventory is used or sold in the order it was acquired, with the cost of goods sold based on the earliest inventory purchases and the valuation of remaining inventory based on the most recent purchases.