{"id":31835,"date":"2024-10-11T16:00:49","date_gmt":"2024-10-11T16:00:49","guid":{"rendered":"https:\/\/vencru.com\/?p=31835"},"modified":"2025-05-20T17:33:58","modified_gmt":"2025-05-20T17:33:58","slug":"how-to-calculate-fifo-cost-of-goods-sold","status":"publish","type":"post","link":"https:\/\/vencru.com\/blog\/how-to-calculate-fifo-cost-of-goods-sold\/","title":{"rendered":"How to Calculate FIFO Cost of Goods Sold"},"content":{"rendered":"\n

Accurately calculating the Cost of Goods Sold (COGS) is crucial for any business that deals with inventory. The FIFO (First In, First Out) method is one of the most widely used inventory valuation methods, and it plays a significant role in determining COGS. In this blog, we\u2019ll explore how to calculate FIFO COGS, compare it with the LIFO (Last In, First Out) method, and provide examples to illustrate the differences between these two approaches. By the end, you\u2019ll have a clear understanding of which method may be better suited for your business. We’ll be discussing:<\/p>\n\n\n\n

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  1. What is FIFO?<\/a><\/li>\n\n\n\n
  2. What is LIFO?<\/a><\/li>\n\n\n\n
  3. How to Calculate FIFO COGS<\/a><\/li>\n\n\n\n
  4. How to Calculate LIFO COGS<\/a><\/li>\n\n\n\n
  5. Examples of FIFO and LIFO Methods<\/a><\/li>\n\n\n\n
  6. Which Method of Inventory is Better, FIFO or LIFO?<\/a><\/li>\n<\/ol>\n\n\n\n

    What is FIFO?<\/h3>\n\n\n\n
    \"How<\/figure>\n\n\n\n

    FIFO stands for First In, First Out. This inventory valuation method assumes that the first items added to the inventory sell first. Essentially, the oldest inventory items sell first, while the newest items remain in stock. Companies often use this method in industries where products have a limited shelf life, such as food or pharmaceuticals.<\/p>\n\n\n\n

    What is LIFO?<\/h3>\n\n\n\n

    LIFO stands for Last In, First Out. In contrast to FIFO, LIFO assumes that the most recently acquired items sell first. This means the newest inventory sells before the older stock. LIFO is less common but sometimes used in industries where prices rise over time, such as the oil industry. This method can help businesses reduce their taxable income during inflationary periods.<\/p>\n\n\n\n

    How to Calculate FIFO COGS<\/h3>\n\n\n\n

    Calculating FIFO COGS involves a few straightforward steps:<\/p>\n\n\n\n

      \n
    1. Identify the Oldest Inventory:<\/strong> Determine which items were added to inventory first. These will be the first ones sold under the FIFO method.<\/li>\n\n\n\n
    2. Determine the Cost of These Items:<\/strong> Calculate the cost of the oldest inventory items. This will form the basis for your COGS.<\/li>\n\n\n\n
    3. Multiply by the Quantity Sold:<\/strong> Finally, multiply the cost of these items by the quantity sold during the period.<\/li>\n<\/ol>\n\n\n\n

      For example, let\u2019s say you purchased 100 units of a product at $10 each in January and another 100 units at $12 each in February. In March, you sold 150 units. Under FIFO, the first 100 units sold would be valued at $10 each, and the next 50 units would be valued at $12 each. Your COGS would be:<\/p>\n\n\n\n

      (100\u00d710)+(50\u00d712)=1000+600=1600<\/p>\n\n\n\n

      How to Calculate LIFO COGS<\/h3>\n\n\n\n
      \"\"<\/figure>\n\n\n\n

      Calculating LIFO COGS follows a similar process but in reverse:<\/p>\n\n\n\n

        \n
      1. Identify the Newest Inventory:<\/strong> Identify the oldest inventory by determining which items were added first. These items will be the first sold under the FIFO method.<\/li>\n\n\n\n
      2. Determine the Cost of These Items:<\/strong> Calculate the cost of the newest inventory items.<\/li>\n\n\n\n
      3. Multiply by the Quantity Sold:<\/strong> Multiply the cost of these items by the quantity sold during the period.<\/li>\n<\/ol>\n\n\n\n

        Using the same example, LIFO values the first 100 units sold at $12 each and the next 50 units at $10 each. Your COGS would be:<\/p>\n\n\n\n

        (100\u00d712)+(50\u00d710)=1200+500=1700<\/p>\n\n\n\n

        Examples of FIFO and LIFO Methods<\/h3>\n\n\n\n

        Let\u2019s explore a couple more examples to solidify your understanding:<\/p>\n\n\n\n

        Example 1: Retail Store<\/strong><\/p>\n\n\n\n

        A retail store buys 200 units of a product in January at $5 each and 300 units in February at $6 each. In March, the store sells 250 units.<\/p>\n\n\n\n