Lifo fifo avco

Lewiswoods

Hi guys, I really need help with this, I understand what they all mean but when it comes to writing it down I just get confused. I have my basic costing exam next Monday so any help would be appreciated

Thanks.

Nps

Hello,

LIFO - Last in first out. You use the most recently bought inventory first, so your cost of sales will be up to date as using the latest prices. However, if you don't keep buying new inventory, as you use older and older inventory, the costs may get less and less accurate as you bought the inventory a long time ago and prices may have changed since then. LIFO could be theoretical or real, ie, is it the actual inventory you are using or just the costs, in other words, are we actually using the brand new inventory at the front of the shelf, leaving the stuff at the back to get dusty, or are we using the older stuff (as it's all indistinguishable anyway) and just using the most up to date prices.

FIFO - first in first out. Using the oldest stock/costs first. Cost of sales, therefore may be slightly out of date, but will not be as out of of date as using the really old inventory with the LIFO method (but not as accurate as new inventory with the LIFO method). With FIFO, Cost of sales will broadly follow the actual costs of the inventory but will lag behind a little. With LIFO, cost of sales will either be very accurate or very inaccurate depending on how old the stock is (and how much costs have fluctuated).

AVCO - the best of both worlds I suppose, all stock is priced accordingly to the average cost of everything currently held. Therefore fluctuating inventory prices are spread across all cost of sales.

Ultimately though, once all the inventory is sold, final costs etc are the same whichever method is used, it just gets accounted for in different ways and in different periods.

Lewiswoods

Thank you Nps much appreciated