How to Calculate LIFO and FIFO: Accounting Methods for Determining COGS Cost of Goods Sold

That leaves 30 units from that purchase and the units purchased on January 22 and 26. The First-In, First-Out method, also called the FIFO method, is the most straight-forward of all the methods. When determining the cost of a sale, the company uses the cost of the oldest (first-in) units in inventory.

While FIFO and LIFO are both cost flow assumption methods, the LIFO method is the opposite of the FIFO method. Standing for last in first out, this inventory valuation method doesn’t sell the oldest items first and uses current prices to calculate the cost of goods sold. FIFO is one of four popular inventory valuation methods, along with specific identification, average cost, and LIFO. The FIFO inventory https://www.bookstime.com/articles/how-to-calculate-fifo-and-lifo method assumes that the first items put into inventory will be the first items sold. Under this method, the inventory that remains on the shelf at the end of the month or year will be assigned the cost of the most recent purchases. When the costs of producing a product or acquiring inventory have been increasing, the LIFO inventory valuation method is used in the COGS (Cost of Goods Sold).

Example: FIFO and LIFO Calculator

Hence, the first 150 units were taken from June and the remaining 100 from May. If you have a look at the cost of COGS  in LIFO, it is more than COGS in FIFO because the order in which the units https://www.bookstime.com/ have been consumed is not the same. In this example as well, we needed to determine the COGS of 250 units. In this example, we started from the units which were received most recently.

Therefore, the most recent costs remain on the balance sheet, while the oldest costs are expensed first. In total, there are four inventory costing methods you can use for inventory valuation and management. It’s accepted by both U.S. and international accounting standards, and it helps businesses figure out how much they’re spending on production. FIFO, first in-first out, means the items that were bought first are the first items sold.

Resources for Your Growing Business

If there were 120 snow globes left at the end of the year, 100 would be valued at the December purchase price and the other 20 would be valued at the November purchase price. It makes no difference when the items in the ending inventory were purchased. If too high of a price point is set for certain products or services offered, potential customers might be deterred from making purchases, leading to decreased revenues and profits for the business.