Examples of the FIFO Method
Example 1:
Suppose XYZ enterprise is engaged in the trading of Wall clocks. The monthly demand for Wall clocks is 4000 units. Following is the finished goods layout received from the manufacturer in the month:
Lot 1: 500 Units
Lot 2: 600 Units
Lot 3: 1000 Units
Lot 4: 1200 Units
Lot 5: 700 Units
Following is the order details for XYZ enterprise:
Order 1: 1000 Units
Order 2: 500 Units
Order 3: 500 Units
Order 4: 200 Units
Order 5: 1800 Units
Solution:
Now, When XYZ enterprise is using the FIFO model, their supplies shall be made as follows:
Order 1: 1000 Units (500 units shall be sourced from Lot 1 and 500 Units shall be sourced from Lot 2)
Order 2: 500 Units (100 Units shall be sourced from Lot 2 and 400 Units shall be sourced from Lot 3)
Order 3: 500 Units (500 Units shall be sourced from Lot 3)
Order 4: 200 Units (100 Units shall be sourced from Lot 3 and the balance of 100 units shall be sourced from Lot 4)
Order 5: 1800 Units (1100 units shall be sourced from Lot 4 and the balance of 700 Units shall be sourced from Lot 5)
Example 2:
XYZ enterprise is engaged in the trading business of Wall clocks. Following is the costing for XYZ enterprise month-wise:
Month |
Units |
Price |
---|---|---|
August |
1000 |
₹250 |
September |
500 |
₹280 |
October |
1500 |
₹275 |
XYZ Enterprise made its first sale in the month of November by selling 600 wall clocks, XYZ enterprise uses the FIFO method of valuation, and they want to know the cost of the sold units.
Solution:
Since XYZ enterprise is using the FIFO model of valuation, the sold 600 units shall be sourced from the units received in August.
Hence the cost for the same shall be as follows-
Costing = COGS Units
Costing = ₹250 × 600
Costing = ₹15,000
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