FIFO (First-In, First-Out)

Definition

An inventory costing method assuming the oldest units purchased are sold first. When costs rise, FIFO produces the lowest cost of goods sold and highest profit.

💡Think of it like this

Think of it like a vending machine—first candy in is first candy out.

📐Formula

COGS = Cost of Oldest Inventory × Units Sold

📝Example

If you bought 100 units at $5 in January, then 100 units at $8 in February, and sell 150 units, FIFO assigns $5 to the first 100 units sold and $8 to the next 50 units. Total COGS = (100 × $5) + (50 × $8) = $900.

Related Terms

Inventory

Goods held for sale (finished goods), in production (work in process), or awaiting use in production (raw materials). A current asset.

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