How to Calculate Fifo Lifo and Average Cost

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Calculation methodology reviewed and verified by David Chen, CFA.

Use this comprehensive calculator to determine the Cost of Goods Sold (COGS) and Ending Inventory (EI) for a period using three standard inventory valuation methods: First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and Weighted Average Cost.

Inventory Valuation Calculator: FIFO, LIFO, and Average Cost

Enter your purchase lots below, and the total units sold during the period.

Purchase Lots

Calculated Inventory Valuation Results

Detailed Calculation Steps:

How to Calculate FIFO, LIFO, and Average Cost Formula

Total Available Units: Sum of all Units purchased.

Total Cost of Available Units: Sum of (Units Purchased × Cost per Unit).

Ending Inventory Units: Total Available Units – Units Sold.

Weighted Average Cost (WAC): Total Cost / Total Available Units

COGS (Weighted Average): Units Sold × WAC

Ending Inventory (Weighted Average): EI Units × WAC

COGS (FIFO): Cost of oldest (first) units sold.

Ending Inventory (FIFO): Cost of newest (last) units remaining.

COGS (LIFO): Cost of newest (last) units sold.

Ending Inventory (LIFO): Cost of oldest (first) units remaining.

Formula Source: Investopedia Formula Source: Accounting Coach

Variables Used

  • Units Purchased: The number of units acquired in a specific lot.
  • Cost per Unit: The price paid per unit for a specific lot.
  • Units Sold: The total number of units sold during the accounting period.
  • Cost of Goods Sold (COGS): The direct costs attributable to the production of the goods sold by a company.
  • Ending Inventory (EI): The total monetary value of goods remaining at the end of the accounting period.

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What is FIFO, LIFO, and Average Cost?

The choice of inventory valuation method significantly impacts a company’s financial statements, specifically the Cost of Goods Sold (COGS) and the value of Ending Inventory. This, in turn, affects Gross Profit and taxable income. GAAP and IFRS govern which methods are permissible (e.g., LIFO is generally restricted under IFRS).

FIFO (First-In, First-Out): Assumes that the oldest inventory purchased is sold first. In times of rising costs (inflation), FIFO generally results in a lower COGS and a higher Ending Inventory value, leading to higher reported profits. This method often reflects the physical flow of goods.

LIFO (Last-In, First-Out): Assumes that the newest inventory purchased is sold first. In times of rising costs, LIFO results in a higher COGS and a lower Ending Inventory value, leading to lower reported profits and lower taxes (in the US, if permitted).

Weighted Average Cost (WAC): Calculates a new average cost per unit after every purchase. This average cost is then used to value both COGS and Ending Inventory. This method is simpler and smooths out price fluctuations, making it ideal for non-perishable or homogenous goods.

How to Calculate Inventory Valuation (Example)

Assume a company has the following purchases and sells 80 units:

  1. Purchase Lot 1: 50 units @ $10.00/unit (Total Cost: $500)
  2. Purchase Lot 2: 70 units @ $12.00/unit (Total Cost: $840)
  3. Total Available: 120 units at a Total Cost of $1340.
  4. Units Sold: 80 units.

Step-by-Step Calculation using FIFO:

  1. The first 50 units sold come from Lot 1 (oldest) at $10.00 each. (50 * $10 = $500 COGS)
  2. The remaining 30 units sold come from Lot 2 (next oldest) at $12.00 each. (30 * $12 = $360 COGS)
  3. FIFO COGS: $500 + $360 = $860.
  4. FIFO Ending Inventory: The remaining 40 units are from Lot 2 (newest). (40 * $12 = $480 EI).

Step-by-Step Calculation using LIFO:

  1. The first 70 units sold come from Lot 2 (newest) at $12.00 each. (70 * $12 = $840 COGS)
  2. The remaining 10 units sold come from Lot 1 (oldest) at $10.00 each. (10 * $10 = $100 COGS)
  3. LIFO COGS: $840 + $100 = $940.
  4. LIFO Ending Inventory: The remaining 40 units are from Lot 1 (oldest). (40 * $10 = $400 EI).

Frequently Asked Questions (FAQ)

Why does FIFO generally result in higher net income during inflation?

When costs are rising, FIFO matches the older, cheaper inventory costs with current sales revenues. This results in a lower Cost of Goods Sold (COGS) compared to LIFO, and therefore a higher Gross Profit and net income.

Is LIFO permitted under International Financial Reporting Standards (IFRS)?

No. IFRS prohibits the use of LIFO because it is considered an unrealistic representation of the physical flow of goods for most businesses and can distort financial results when inventory costs are changing.

What is the main advantage of the Weighted Average Cost method?

The primary advantage is its simplicity and its ability to smooth out large fluctuations in inventory prices. It is suitable for businesses that deal with high volumes of identical, interchangeable goods.

How do these methods affect a company’s balance sheet?

The method chosen directly affects the value of the Ending Inventory reported in the Current Assets section of the balance sheet. FIFO typically results in an Ending Inventory value that is closest to current market costs.

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