CIMA BA3 Syllabus C. PREPARATION OF ACCOUNTS FOR SINGLE ENTITIES - FIFO and AVCO - Notes ^{17 / 20}

FIFO (first in, first out)

FIFO assumes that materials are issued out of inventory in the order in which they were delivered into inventory, i.e. issues are priced at the cost of the earliest delivery remaining in inventory

Illustration FIFO

What is the value of the closing inventory if the FIFO method of valuation is used below?

Solution

The issue on 12/07 will first be issued from the opening balance (20 units) and then the receipt on 08/07 (the remaining 20 units).

The issue on 26/07 will first be issued from the remaining 20 units from 08/07 receipt, and then the 80 units will be issued from 18/07 receipt.

Therefore closing inventory will be 20 units from 18/07 receipt (20*4.6 = $92 is the value of the closing inventory).

AVCO (average cost)

AVCO calculates a weighted average price for all units in inventory. Issues are priced at this average cost, and the balance of inventory remaining would have the same unit valuation.

A new weighted average price is calculated whenever a new delivery of materials into store is received. 

LIFO is no longer permitted under IAS 2.