Example: - The following units of item X are available for sale.

Item –X units cost

Jan 1 inventory 20 $ 20
4 sale 14
10 purchase 16 21
22 sale 8
28 sale 4
30 purchase 20 22
The firm used a perpetual inventor system, and there are 30 units of one item on hand at the end
of the year. What is the total cost of goods sold and ending inventory according to?
A. FIFO B. LIFO C. Average Cost Method.
First- in first – out (FIFO) method
Using cost, costs are included in the merchandise sold in the order in which they were incurred.
Purchases Cost of merchandise sold Inventory

Date Quantity Unit cost Total cost Quantity Unit cost Total cost Quantity Unit cost Total cost

1 20 20 400

4 14 20 280 6 20 120

10 16 21 336 6 20 120
16 21 336
22 6 20 120 14 21 294
2 21 42
28 4 21 84 10 21 210

30 20 22 440 10 21 210
20 22 440
Total 26 $526 30 $650

Thus cost of merchandise sold = $ 526, cost of ending inventory = $ 650.

Last in First Out (LIFO) method

Purchases Cost of merchandise sold Inventory

Date Quantity Unit cost Total cost Quantity Unit cost Total cost Quantity Unit cost Total cost

1 20 20 400

4 14 20 280 6 20 120

10 16 21 336 6 20 120
16 21 336
 22 8 21 168 6 20 120
8 21 168
28 4 21 84 6 20 120
4 21 84
30 20 22 440 6 20 120
4 21 84
20 22 440
Total 26 $532 30 $644

Average cost method

When the average cost method is used in a perpetual inventory system an average unit cost for
each type of item is computed each time a purchase is made. This unit cost is then used to determine
the cost of each sale until another purchase is made and a new average is computed. These
averaging techniques called a moving average
Purchases Cost of merchandise sold Inventory

Date Quantity Unit cost Total cost Quantity Unit cost Total cost Quantity Unit cost Total cost

Jan 1 20 20 400

4 14 20 280 6 20 120

10 16 21 336 22 20.7 456

22 8 20.7 166 14 20.7 290

28 4 20.7 83 10 20.7 207

30 20 22 440 30 21.56 647

Total 26 $529 30 $647

Cost of merchandise sold = 529, Cost of ending inventory =647