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• FIFO


  First In, First Out - an inventory costing method where the first units purchased are the first ones sold
• PAS 2, paragraph 25


  Expressly provides that the cost of inventory shall be determined by using either First in, First out or Weighted average
• The standard does not permit anymore the use of the last in, first out (LIFO) as an alternative formula in measuring cost of inventory
• First in, First out (FIFO)


  The FIFO method assumes that the goods first purchased are first sold and consequently the goods remaining in the inventory at the end of the period are those most recently purchased or produced
• The FIFO is in accordance with the ordinary merchandising procedure that the goods are sold in the order they are purchased
• FIFO rule


  First come, first sold
• FIFO inventory


  • Expressed in terms of recent or new prices
  • Cost of goods sold is representative of earlier or old prices
• FIFO method


  Favors the statement of financial position in that the inventory is stated at current replacement cost
• FIFO method


  Results in improper matching of cost against revenue because the goods sold are stated at earlier or older prices resulting in understatement of cost of goods sold
• In a period of inflation or rising prices

  FIFO method would result to the highest net income
• In a period of deflation or declining prices


  FIFO method would result to the lowest net income
• Weighted average method (when used with perpetual system)

  1. Calculate new weighted average unit cost after every purchase and purchase return

  2. Divide total cost of goods available by total units available for sale to get new weighted average unit cost

  3. Multiply new weighted average unit cost by units on hand to get inventory cost
• Moving average method


  • Requires keeping inventory stock card to monitor "moving" unit cost after every purchase
• Last in, First out (LIFO)

  Goods last purchased are first sold, inventory expressed in terms of earlier/old prices, cost of goods sold representative of recent/new prices
• LIFO


  • Favors income statement as it matches current cost against current revenue
  • Inventory stated at earlier/older prices, may have significant lag between inventory valuation and current replacement cost
  • Permits income manipulation through year-end purchases to preserve existing inventory layers
  • Results in lowest net income in period of rising prices, highest net income in period of declining prices
• Specific identification


  Specific costs attributed to identified items of inventory, cost determined by multiplying units on hand by actual unit cost
• Specific identification method


  • Appropriate for inventories segregated for specific project or not ordinarily interchangeable
  • Can be used in either periodic or perpetual inventory system
  • Flow of inventory cost corresponds with actual physical flow of goods
  • Actual determination of cost of units sold and on hand
  • Very costly to implement
• Standard costs


  Predetermined product costs established based on normal levels of materials, labor, efficiency and capacity utilization
• Standard costing


  • Standards set should be realistically attainable and reviewed/revised regularly
  • Taken up in higher accounting course, not discussed further
• Relative sales price method

  Single cost apportioned among commodities based on their respective sales price, based on philosophy that cost is proportionate to selling price