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First-In-First-Out (FIFO) Method
FIFO method definition
First-in-first-out (FIFO) method is an accounting tool used to find out the value or cost of inventory (ending inventory) and cost of goods sold (COGS). According to this method, the inventory which is purchased at first is sold out or used at first. This method is applicable to the company’s that sales flexible goods. According to this method, the closing stock includes the inventories which are recently purchased.
First-in-first-out (FIFO) method is used in both periodic and perpetual inventory system to calculate the cost of ending inventory and cost of goods sold. Under both inventory system, FIFO method provides same output (answer) over the same question. When in purchasing transactions of a company, if there is unit cost of inventory is continuous increases FIFO method increases the tax expense of a company. Similarly, if there is unit cost of inventory is continuous decreases FIFO method saves the tax expenses for a company over the same information.
Comparison with the LIFO method
In comparison with Last-in-first-out (LIFO) method and FIFO method. When there is unit cost of inventory is continuous increases (e.g. Rs. 2, 5, 6, 8, & so on) in that case LIFO method provides less tax to the company. Also, when there is unit cost of inventory is continuous decreases (e.g. Rs. 8, 6, 5, 3) in that case the FIFO method provides less tax to the company. Similarly, when there is unit cost of inventory is sometimes increases or decreases (e.g. Rs. 2, 7, 4, 6, 9) in that case either LIFO or FIFO method provides less tax to the company. It means that it is necessary to calculate manually.
Having a higher cost of goods sold (COGS) amount method provides less tax for the company. It is because the cost of goods sold helps to reduce the gross profit to the business firm and tax.
May we also illustrate to clarify the above discussion
Example-I: In Case of Increasing Unit cost
The following information was found in the books of ABC Company for the month of January 2019. Purchases for the month are as follows:
| Date | Units | Unit Cost |
| January 1 | 400 | 4 |
| January 3 | 800 | 5 |
| January 19 | 1,000 | 7 |
| January 26 | 400 | 9 |
During the month the company sold 2,000 units @ Rs. 12 each. Using the FIFO method calculate the cost of ending inventory and cost of goods sold under the periodic inventory system.
Solution:
Under the periodic inventory system
Calculation of cost of goods available for sales
| Date of purchase | Units purchased | Unit Cost | Total Cost (Rs.) |
| Beginning inventory January 3 January 19 January 26 | 400 800 1,000 400 | 4 5 7 9 | 1,600 4,000 7,000 3,600 |
| Total | 2,600 | 16,200 |
Cost of goods sold schedule
Under the FIFO method
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| Beginning inventory January 3 January 19 | 400 800 800 | 4 5 7 | 1,600 4,000 5,600 |
| Total | 2,000 | 11,200 |
Cost of Ending Inventory
Under the FIFO method
| Date of purchase | Units on hand | Unit Cost | Total Cost Rs. |
| January 26 January 19 | 400 200 | 9 7 | 3,600 1,400 |
| Total | 600 | 5,000 |
Hence,
Cost of goods sold (COGS) = Rs. 11,200 and cost of ending inventory = Rs. 5,000
Example-II: In Case of Decreasing Unit cost
Following information’s are available in the book of ABC Company at the time of January 2019.
Purchases during the month,
| Date | Units | Unit Cost |
| January 1 | 400 | 9 |
| January 3 | 800 | 7 |
| January 19 | 1,000 | 5 |
| January 26 | 400 | 4 |
The company sold 2,000 units during the month @ Rs. 12 each. Using the FIFO method calculate the cost of ending inventory and cost of goods sold under the periodic inventory system.
Solution:
Under the Periodic Inventory System
Calculation of cost of goods available for sale
| Date of purchase | Units purchased | Unit cost | Total Cost (Rs) |
| Beginning inventory January 3 January 19 January 26 | 400 800 1,000 400 | 9 7 5 4 | 3,600 5,600 5,000 1,600 |
| Total | 2,600 | 15,800 |
Calculation of COGS and cost of ending inventory
Using the FIFO method
Cost of goods sold schedule
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| Beginning inventory January 3 January 19 | 400 800 800 | 9 7 5 | 3,600 5,600 4,000 |
| Total | 2,000 | 13,200 |
Cost of Ending inventory
| Date of purchase | Units on hand | Unit cost | Total cost (Rs.) |
| January 26 January 19 | 400 200 | 4 5 | 1,600 1,000 |
| Total | 600 | 2,600 |
Hence, Cost of goods sold = Rs. 13,200 and Cost of ending inventory = Rs. 2,600