1) First-in First-out (FIFO) Method

It is an accounting method in which assets purchased or acquired first are disposed of first. FIFO
assumes that the remaining inventory consists of items purchased last. An alternative to FIFO,
LIFO is an accounting method in which assets purchased or acquired last are disposed of first.

Meaning: FIFO, first in-first out, means the items that were bought first are the first items
sold. Cost of sales is determined by the cost of the items purchased the earliest. Ending
inventory is valued by the cost of items most recently purchased

2) Calculation for the FIFO

To calculate FIFO (First-In, First Out) determine the cost of your oldest inventory and
multiply that cost by the amount of inventory sold.

3) Weighted average

Weighted average is a calculation that takes into account the varying degrees
of importance of the numbers in a data set. In calculating a weighted
average, each number in the data set is multiplied by a predetermined weight
before the final calculation is made

4) Calculation for the weighted average Method

When using the weighted average method, divide the cost of goods available for sale by the
number of units available for sale, which yields the weighted-average cost per unit. In this
calculation, the cost of goods available for sale is the sum of beginning inventory and net
purchases. You then use this weighted-average figure to assign a cost to both ending
inventory and the cost of goods sold.
5) Merits And Demerits

Merits

The following merits are claimed for FIFO method:

1. The following merits are claimed for FIFO method:

2. It is based on a realistic assumption that materials are issued in the order of their receipts
3. Materials are issued at actual cost and thus no unrealized profit/loss arises from the
operation of this method
4. Valuation of closing inventory is at cost as well as at the latest prices paid.
5. Value of closing stock of materials will reflect the current market price.

6. FIFO method saves money and time in calculating the exact cost of the inventory being
sold because the cost will depend upon the most former cash flows of purchases to be
used first
7. This method is easy to understand and simple to operate.
8. It is a widely used and accepted approach of valuation which increases its comparability
and consistency
9. FIFO will show increased gross and net profits in times of increasing prices of goods

Demerits

The main disadvantages of this method are:

1. As materials are charged to production at the old prices, the cost of production
may lag behind the current economic values.
2. This method does not permit comparison of the costs of similar jobs or cost units
because similar jobs simultaneously started may be charged materials at different
prices.
 3. When prices are subject to frequent changes, this method involves cumbersome
records and calculations.
4. One of the biggest disadvantage of FIFO approach of valuation for
inventory/stock is that in the times of inflation it results in higher profits
5. FIFO method is improper if many lots are purchased during the period at different
prices.
6. The objective of matching current costs with current revenues cannot be achieved
under FIFO method.
7. If the prices of materials are rising rapidly, the current production cost may be
understated.
8. FIFO method overstates profit especially in inflation.

4) Name of the products part where FIFO is used

 LED Indicators

 Sockets

 LED Tube Lights

5) One month’s data

 Material receipts from purchase register.

 Material issue from stock issue registers.
 1 FIFO and Weighted Average method under the product of LED Indicators

1 July Opening stock 800 Unit @ Rs.20 each

4 July Purchased 500 Unit @ Rs.22 each

7 July Issued 400 Unit

8 July Purchased 700 Unit @Rs.23each

9 July Issued 800 Unit

10 July Purchased 600 Unit @Rs.25 each

12 July Issued 800 Unit

14 July Issued 300 Unit

16 July Purchased 800 Unit @Rs.27 each

18 July Issued 400 Unit

19 July Issued 500 Unit

22 July Purchased 600 Unit @Rs.28each

24 July Issued 500 Unit

26 July Purchased 700 Unit @Rs.30 each

30 July Issued 600 Unit

FIFO METHOD

Date Receipts Issues Balance

Qty. Rate Amt. Qty. Rate Amt. Qty. Rate Amt.
Units Rs Rs Units Rs Rs Units Rs Rs
1 July 800 20 16000

4 July 500 22 11000 800 20 16000

500 22 11000

7 July 400
400 20 8000 400 20 8000
500 22 11000

8 July 700 23 16100 400 20 8000

500 22 11000
700 23 16100

9July 800
400 20 8000 100 22 2200
400 22 8800 700 23 16100

10 July 600 25 15000 100 22 2200

700 23 16100
600 25 15000

12 July 800
100 22 2200
700 23 16100 600 25 15000

14 July 300
300 25 7500 300 25 7500

16 July 800 27 21600 300 25 7500

800 27 21600

18 July 400
300 25 7500
100 27 2700 700 27 18900
19 July 500
500 27 13500 200 27 5400

22 July 600 28 16800 200 27 5400

600 28 16800

24 July 500
200 27 5400
300 28 8400 300 28 8400

26 July 700 30 21000 300 28 8400

700 30 21000

30 July 600
300 28 8400
300 30 9000 400 30 12000

Weighted Average Method

Receipts Issues Balance

Date Qty. Rate Amt. Qty. Rate Amt. Qty. Rate Amt.
Units Rs Rs Units Rs Rs Units Rs Rs
1 July - - - 800 20.00 16000
4 July 500 22 1100 1300 20.76 26988
7 July 400 20.76 8304 900 20.76 18684
8 July 700 23 16100 1600 21.74 34784
9July 800 21.74 17392 800 21.74 17392
10 July 600 25 15000 1400 23.13 32382
12 July 800 23.13 18504 600 23.13 13878
14 July 300 23.13 6939 300 23.13 6939
16 July 800 27 21600 900 31.71 28539
18 July 400 31.71 12684 500 31.71 15855
19 July 500 31.71 15855 - - -
22 July 600 28 16800 600 54.42 32652
24 July 500 54.42 57210 100 54.42 5442
26 July 700 30 21000 800 33.05 26440
30 July 600 33.05 19830 200 33.05 6610

Note: The issue prices calculated as follows

1. On 4 July =16000+11000=27000
=27000/1300=20.76
2. On 8 July= 18684+16100=34784
=34784/1600=21.74
3. On 10 July=17392+15000=32392
=32392/1400=23.13
4. On 16 July= 6939+21600=28539
=28539/900=31.71
5. On 22 July =15855+16800=32655
=32655/600=54.42
6. On 26 July=5442+21000=26442
=26442/800=33.05

Closing Stock=200 Unit @33.05= 6610

Interpretation: The inventory valuation for the month of July will be, The cost product sold
based on the FIFO method would be 400 Unit @Rs.30=12000. and the cost product sold based
on the Weighted Average method would be 200 Unit @Rs33.05=6610.
 2 FIFO and Weighted Average method under the product of LED
Tube Lights

Opening stock
1 July 500 Unit @ Rs.20 each
Purchased
3 July 800 Unit @ Rs.21 each

5 July Issued 500 Unit

Issued
7 July 600 Unit

Purchased
9 July 800 Unit @Rs.23 each

11 July Issued 700 Unit

12 July Purchased 300 Unit @Rs.24 each

Issued
13 July 500 Unit

15 July Purchased 700 Unit @Rs.25 each

17 July Purchased 400 Unit @Rs.25 each

20 July Issued 500 Unit

22 July Purchased 400 Unit @Rs.26each

25 July
Issued 500 Unit

28 July Issued 500 Unit

29 July Purchased 600 Unit @Rs.27 each

31 July Issued 300 Unit

FIFO METHOD

Date Receipts Issues Balance

Qty. Rate Amt. Qty. Rate Amt. Qty. Rate Amt.
Units Rs Rs Units Rs Rs Units Rs Rs
1 July 500 20 10000

3July 800 21 16800 500 20 10000

800 21 16800

5 July 500
500 20 10000 800 21 16800

7 July 600
600 21 12600 200 21 4200

9July 800 23 18400 200 21 4200

800 23 18400

11 July 700
200 21 4200
500 23 11500 300 23 6900

12 July 300 24 7200 300 23 6900

300 24 7200

13 July 500
300 23 6900
200 24 4800 100 24 2400

15 July 700 25 17500 100 24 2400

700 25 17500

17 July 400 25 10000 100 24 2400

700 25 17500
400 25 10000

20July 500
100 24 2400
400 25 10000 300 25 7500
400 25 10000
22 July 400 26 10400
300 25 7500
400 25 10000
400 26 10400

25 July 500
300 25 7500
200 25 5000 200 25 5000
400 26 10400

28 July 500
200 25 5000
300 26 7800 100 26 2600

29 July 600 27 16200 100 26 2600

600 27 16200

31July 300
100 26 2600
200 27 5400 400 27 10800

Weighted Average Method

Receipts Issues Balance

Date Qty. Rate Amt. Qty. Rate Amt. Qty. Rate Amt.
Units Rs Rs Units Rs Rs Units Rs Rs
1 July 500 20.00 10000
3 July 800 21 16800 1300 20.61 26793
5 July 500 20.61 10305 800 20.61 16488
7 July 600 20.61 12366 200 20.61 4122
9July 800 23 18400 1000 22.52 22520
11 July 700 22.52 15764 300 22.52 6756
12 July 300 24 7200 600 23.26 13956
13 July 500 23.26 11630 100 23.23 2326
15 July 700 25 17500 800 24.84 19808
17 July 400 25 10000 1200 24.84 29808
20 July 500 24.84 12420 700 24.84 17388
22 July 400 26 10400 1100 25.26 27786
25 July 500 25.26 12630 600 25.26 15156
28 July 500 25.26 12630 100 25.26 2526
29 July 600 27 16200 700 26.75 18725
30July 300 26.75 8025 400 26.75 10700

Note: The issue prices calculated as follows

1. On 3 July =10000+16800=26800
=26800/1300=20.61
2. On 9 July= 4122+18400=22522

=22522/1000=22.52

3. On 12 July =6756+7200=13956
=13956/600=23.26
4. On 15 July =2326+17500=19826
=19826/800=24.78
5. On 17July =19808+10000=29808
=29808/1200=24.84
6. On 22 July =17388+10400=27788
=27788/25.26
7. On 29 July =2526+16200=18726
=18726/700=26.75

Closing Stock=400 Unit @26.75= 10700

Interpretation: The inventory valuation for the month of July will be, The cost product sold
based on the FIFO method would be 400 Unit @Rs.27=10800. and the cost product sold based
on the Weighted Average method would be 400 Unit @Rs26.75=10700.
 3 FIFO and Weighted Average method under the product of Sockets

Opening stock
2 July 700 Unit @ Rs.20 each
Purchased
5 July 400 Unit @ Rs.22 each

8 July Issued 300 Unit

Purchased
9 July 600 Unit @Rs.23each

10 July Issued 700 Unit

11 July Purchased 500 Unit @Rs.24 each

Issued
13 July 700 Unit

Issued
15 July 400 Unit

17 July Purchased 800 Unit @Rs.25 each

19 July Issued 300 Unit

20 July Issued 400 Unit

23 July Purchased 500 Unit @Rs.26each

25 July
Issued 600 Unit

27 July Purchased 600 Unit @Rs.28 each

30July Issued 400 Unit

FIFO METHOD

Receipts Issues Balance

Date Qty. Rate Amt. Qty. Rate Amt. Qty. Rate Amt.
Units Rs Rs Units Rs Rs Units Rs Rs
2 July 700 20 14000

5 July 400 22 8800 700 20 14000

400 22 8800

8 July 300
300 20 600 400 20 8000
400 22 8800

9 July 600 23 13800 400 20 8000

400 22 8800
600 23 13800

10July 700
400 20 8000
300 22 6600 100 22 2200
600 23 13800

11 July 500 24 12000 100 22 2200

600 23 13800
500 24 12000

13 July 700
100 22 2200
600 23 13800 500 24 12000

15 July 400
400 24 9600 100 24 2400

17 July 800 25 20000 100 24 2400

800 25 20000

19 July 300
100 24 2400
200 25 5000 600 25 15000

20July 400
 400 25 10000 200 25 5000

23 July 500 26 13000 200 25 5000

500 26 13000

25 July 600
200 25 5000
400 26 10400 100 26 2600

27 July 600 28 16800 100 26 2600

600 28 16800

30 July 400
100 26 2600
300 28 8400 300 28 8400

Weighted Average Method

Receipts Issues Balance

Date Qty. Rate Amt. Qty. Rate Amt. Qty. Rate Amt.
Units Rs Rs Units Rs Rs Units Rs Rs
2 July 700 20.00 14000
5 July 400 22 8800 1100 20.72 22792
8 July 300 20.72 6216 800 20.72 16576
9 July 600 23 13800 1400 21.69 30366
10July 700 21.69 15183 700 21.69 15183
11 July 500 24 1200 1200 22.65 27180
13 July 700 22.65 15855 500 22.65 11325
15 July 400 22.65 9060 100 22.65 2265
17 July 800 25 20000 900 24.73 22257
19 July 300 24.73 7419 600 24.73 14838
20 July 400 24.73 9892 200 24.73 4946
23 July 500 26 13000 700 25.63 17941
25 July 600 25.63 15378 100 25.63 2563
27 July 600 28 16800 700 27.66 19362
30 July 400 27.66 11064 300 27.66 8298

Note: The issue prices calculated as follows

1. On 5 July =14000+8800=22800
=22800/1100=20.72
2. On 9 July =16576+13800=30376
=30376/1400=21.69
3. On 11 July= 15183+12000=27183
=27183/1200=22.65
4. On 17 July= 2265+20000=22265
=22265/900=24.73
5. On 23 July =4946+13000=17946
=17946/700=25.63
6. On 27 July= 2563+16800=19363
=19363/700=27.66

Closing Stock=300 Unit @27.66= 8298

Interpretation: The inventory valuation for the month of July will be, The cost product sold
based on the FIFO method would be 300 Unit @Rs.28=8400. and the cost product sold based on
the Weighted Average method would be 300 Unit @Rs27.66=8298.

Findings

 Company's aim to achieve more sale it may require huge amount of inventory in future
 There is good relationship between company and their distributors, vendors and sales
executives
 There is positive correlation between sales to inventory
  Company wants the all data in easy way to understand it takes time but company use only
the FIFO method for the understand the closing stock.
 The FIFO method is based companies’ realistic assumption that materials are issued in
the order of their receipts.
 Materials are issued from the company at actual cost and thus no unrealized profit/loss
arises from the operation of this method.

Weighted average method is better than FIFO

 Weighted average is easy to understand to the company for the calculations FIFO is also
easy but WAM is easier than that of FIFO.
 WAM is helps to manage companies the time for utilize the time.
 This method smoothens out the effect of fluctuations in purchase price It is thus,
particularly advantageous where price variations are wide so that extreme prices are
ironed out.
 Weighted average method is smoothens than that of FIFO method for calculate the costs.
 It’s easier than that of FIFO method.

Disadvantages for the company from FIFO method

 Company charged to production at the old price, and the economic values are always
changed and its effect on production cost which is not profitable for the company.
 This method is more time consuming method it takes lot of time for calculating the data.
 Sometime the company purchase many lost at a time with different price that time FIFO
is not working good.
 The company’s objective of matching current costs with current revenues cannot be
achieved under FIFO method.
 Because of using FIFO method by the company they have to overstates profit especially
in inflation.