FIFO, LIFO, and Weighted Average; How to track your inventory
It is important for any successful business to keep good track of their inventory
. Without taking the proper steps to track the inventory of your business you will certainly not be running at peak efficiency. There are three fairly simple methods that can be used to carefully and successfully to track your inventory. The three methods are, first-in, first out (FIFO), last-in, first-out (FIFO), and weighted average.
FIFO and LIFO have a similar structure but vary about what merchandise you sell first. Remember FIFO stands for first-in, first-out, which is literally how you sell your merchandise. The earlier merchandise you have needs to be sold before you sell your newer merchandise. To demonstrate let's say you have a beginning inventory (BI) of 10 units, each costing $1.00, for a total of $10. Then you purchase another 10 units at $1.20 each for a total of $12.00. Add your beginning inventory and your purchases and now your inventory consists of 20 units valued at $22.00. Now say over a period of time you sell 13 units. Since we are using FIFO you would sell the first 10 units you bought, valued at $1.00 each with a total value of $10.00. Next you would sell 3 units, each of which cost $1.20 for a total value of $3.60. The first units you brought in were the first units you sold. After those transactions you are left with 7 units in your inventory, each of which cost $1.20 for a total ending inventory (EI) of $8.40. Now to find the cost of goods sold (CGS) simply add BI and purchases, followed by subtracting you EI. For this example the CGS would be $13.60.
In order to do the LIFO inventory method simply do what you did for FIFO except for the one crucial difference. The first merchandise you sell is the last merchandise you got in. So going back to the example used to demonstrate FIFO, if you had the same inventory (20 units worth $22.00) and you sold 13 units, the first ten you sold would each cost $1.20 for a total of $12.00, plus another 3 units at $1.00 each for a total of $3.00. The inventory you are left with is 7 units, each worth $1.00, giving you an EI worth $7.00. Your CCS in this scenario would be $15.00.
The last method used to track inventory is weighted average. Weighted average is not like FIFO or LIFO; rather it takes the total cost of you inventory, and divides it by the number of units. So going back to the same base example we've been using, you have 20 units with a total value of $22.00. That means the cost of each unit is $1.10 each. If you then sell 13 units, with the cost of each unit being $1.10, the total is $14.30. You have 7 units left in EI, with a total value of $7.70. The CGS for weighed average in this example is $14.30
FIFO, LIFO, and Weighted Average; How to track your inventory
By: Shawn Kienast
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