FIFO Inventory

Lesson:

FIFO stands for first in, first out. This means that older inventory is sold first.

Imagine people lining up at store. The people at the front of the line have been there the longest. When a clerk is available, he'll go to the person at the front of the line, he'll speak to the person in the front of the line. In other words, the person that was there the longest is the first one who will get to complete his business and leave the line.

In other words, the first person that was waiting gets to be the first person to leave the line.

You're managing an inventory system using the FIFO method.

Here are the relevant facts:

  • Right after updating your inventory records, customers bought 157 rings.
  • Your inventory of rings was purchased in different quantities and at different prices, as shown below:
    Inventory Holdings
    Inventory PurchaseCountPrice per UnitProduct Name
    Purchase #1 47 $47 Rings
    Purchase #2 43 $19 Rings
    Purchase #3 17 $47 Rings
    Purchase #4 21 $12 Rings
    Purchase #5 36 $36 Rings
Using the FIFO method, what is the COGS of the items you just sold?

Answer:

  • The COGS is $5,121.00.

Explanation:

  1. The first step should be to write out the current inventory.
    Inventory Holdings
    Inventory PurchaseCountPrice per UnitProduct Name
    Purchase #1 47 $47 Rings
    Purchase #2 43 $19 Rings
    Purchase #3 17 $47 Rings
    Purchase #4 21 $12 Rings
    Purchase #5 36 $36 Rings
  2. Now write down the number of customer sales we need to account for (157) and the quantity of items that the firm bought in the earliest inventory purchase in our table (47).
  3. We need to account for more sales than can be covered by our most recent inventory purchase. Let's remove the entire earliest inventory purchase from our inventory table and reduce the number of sales we have to account for by the quantity of inventory we just removed (47).
    157 - 47 = 110
  4. Don't forget that we're trying to solve for COGS though, so as we sell items, we have to record their costs.
    COGS FOR THIS ROW = 47 * $47
  5. Now our inventory table looks like this.
    Inventory Holdings
    Inventory PurchaseCountPrice per UnitProduct Name
    Purchase #2 43 $19 Rings
    Purchase #3 17 $47 Rings
    Purchase #4 21 $12 Rings
    Purchase #5 36 $36 Rings
  6. Now write down the number of customer sales we need to account for (110) and the quantity of items that the firm bought in the earliest inventory purchase in our table (43).
  7. We need to account for more sales than can be covered by our most recent inventory purchase. Let's remove the entire earliest inventory purchase from our inventory table and reduce the number of sales we have to account for by the quantity of inventory we just removed (43).
    110 - 43 = 67
  8. Don't forget that we're trying to solve for COGS though, so as we sell items, we have to record their costs.
    COGS FOR THIS ROW = 43 * $19
  9. Now our inventory table looks like this.
    Inventory Holdings
    Inventory PurchaseCountPrice per UnitProduct Name
    Purchase #3 17 $47 Rings
    Purchase #4 21 $12 Rings
    Purchase #5 36 $36 Rings
  10. Now write down the number of customer sales we need to account for (67) and the quantity of items that the firm bought in the earliest inventory purchase in our table (17).
  11. We need to account for more sales than can be covered by our most recent inventory purchase. Let's remove the entire earliest inventory purchase from our inventory table and reduce the number of sales we have to account for by the quantity of inventory we just removed (17).
    67 - 17 = 50
  12. Don't forget that we're trying to solve for COGS though, so as we sell items, we have to record their costs.
    COGS FOR THIS ROW = 17 * $47
  13. Now our inventory table looks like this.
    Inventory Holdings
    Inventory PurchaseCountPrice per UnitProduct Name
    Purchase #4 21 $12 Rings
    Purchase #5 36 $36 Rings
  14. Now write down the number of customer sales we need to account for (50) and the quantity of items that the firm bought in the earliest inventory purchase in our table (21).
  15. We need to account for more sales than can be covered by our most recent inventory purchase. Let's remove the entire earliest inventory purchase from our inventory table and reduce the number of sales we have to account for by the quantity of inventory we just removed (21).
    50 - 21 = 29
  16. Don't forget that we're trying to solve for COGS though, so as we sell items, we have to record their costs.
    COGS FOR THIS ROW = 21 * $12
  17. Now our inventory table looks like this.
    Inventory Holdings
    Inventory PurchaseCountPrice per UnitProduct Name
    Purchase #5 36 $36 Rings
  18. Now write down the number of customer sales we need to account for (29) and the quantity of items that the firm bought in the earliest inventory purchase in our table (36).
  19. Since the number of items we need to account for (29) is lower than the remaining items left in the most recent inventory purchase (36), we can just reduce the quantity of items in the earliest inventory purchase by (29).
  20. Don't forget that we're trying to solve for COGS though, so as we sell items, we have to record their costs.
    COGS FOR THIS ROW = 29 * $36
  21. Here's the final state of our inventory table:
    Inventory Holdings
    Inventory PurchaseCountPrice per UnitProduct Name
    Purchase #5 7 $36 Rings
  22. And now we just have to take all of those statements where we figured out the COGS for each row, and add them up.
    TOTAL COGS = 47 * $47 + 43 * $19 + 17 * $47 + 21 * $12 + 29 * $36
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