How To Calculate The Cost Of Ending Inventory Using Fifo

Calculate Cost of Ending Inventory (FIFO)

Enter your inventory purchase layers (oldest first) and units sold to calculate the cost of ending inventory using the FIFO method.

Layer 1 (Oldest Purchase)

Layer 2

Layer 3

Layer 4

Layer 5 (Newest Purchase)

Layer	Beginning Units	Unit Cost ($)	Units Sold from Layer	Cost of Units Sold ($)	Ending Units	Ending Value ($)

Table: FIFO Inventory Layers and Cost Allocation

What is the Cost of Ending Inventory Using FIFO?

The cost of ending inventory using FIFO (First-In, First-Out) is an inventory valuation method that assumes the first items purchased or produced are the first ones sold. Consequently, the items remaining in inventory at the end of an accounting period are assumed to be those most recently purchased or produced. This method reflects the flow of costs in a way that often matches the actual physical flow of goods for many businesses, especially those dealing with perishable goods or items with a limited shelf life.

Calculating the cost of ending inventory using FIFO is crucial for determining the Cost of Goods Sold (COGS) and the value of inventory on the balance sheet. In periods of rising prices, FIFO generally results in a lower COGS, a higher net income, and a higher ending inventory value compared to the LIFO (Last-In, First-Out) method.

Businesses that deal with products where the oldest stock needs to be sold first, like food or pharmaceuticals, often find FIFO aligns well with their operations. However, any business can choose FIFO for accounting purposes, regardless of the actual flow of goods, as long as it’s applied consistently.

Cost of Ending Inventory Using FIFO Formula and Mathematical Explanation

The FIFO method doesn’t have a single formula for ending inventory itself, but rather a process to determine it:

1. List Purchases: Identify all inventory purchase layers during the period, including beginning inventory, noting the number of units and cost per unit for each layer, from oldest to newest.
2. Determine Units Sold: Know the total number of units sold during the period.
3. Allocate Costs to COGS: Starting with the oldest purchase layer, allocate the cost of units sold. If the units sold exceed the units in the oldest layer, move to the next oldest layer and continue until all units sold are accounted for. The sum of these costs is the Cost of Goods Sold (COGS).
4. Calculate Ending Inventory: The units remaining in the most recent purchase layers constitute the ending inventory. The cost of ending inventory using FIFO is the sum of the value of these remaining units (remaining units in each layer * their respective cost per unit).

Ending Inventory Value = (Remaining Units from Layer N * Cost per Unit N) + (Remaining Units from Layer N-1 * Cost per Unit N-1) + …

Where Layer N is the most recent purchase, N-1 is the second most recent, and so on, for all layers with remaining units.

Variables Table:

Variable	Meaning	Unit	Typical Range
Units Purchased (per layer)	Number of items bought in a specific batch	Units	1 – 1,000,000+
Cost per Unit (per layer)	Purchase price of one item in that batch	$	0.01 – 10,000+
Units Sold	Total number of items sold during the period	Units	0 – Total units available
COGS	Cost of Goods Sold	$	Calculated
Ending Inventory Value	Value of remaining inventory	$	Calculated

Practical Examples (Real-World Use Cases)

Example 1: Rising Prices

A bookstore has the following inventory purchases of a popular novel during the month:

• Beginning Inventory: 50 units @ $10/unit
• Purchase 1 (Jan 5): 100 units @ $12/unit
• Purchase 2 (Jan 15): 80 units @ $13/unit

During January, the bookstore sold 180 units. Let’s calculate the cost of ending inventory using FIFO and COGS.

Total units available = 50 + 100 + 80 = 230 units.

Units sold = 180 units. Under FIFO, these are from:

• 50 units from Beginning Inventory @ $10 = $500
• 100 units from Purchase 1 @ $12 = $1200
• 30 units from Purchase 2 @ $13 = $390 (180 – 50 – 100 = 30)

COGS = $500 + $1200 + $390 = $2090

Ending Inventory: 230 total units – 180 sold = 50 units remaining. These are from the most recent purchase:

• 50 units from Purchase 2 @ $13 = $650 (80 – 30 = 50 remaining)

So, the cost of ending inventory using FIFO is $650.

Example 2: Stable Prices with Multiple Sales

A tech store buys and sells external hard drives:

• Jan 1: Beginning Inventory: 30 units @ $50/unit
• Jan 10: Purchase: 50 units @ $50/unit
• Jan 15: Sale: 40 units
• Jan 20: Purchase: 40 units @ $51/unit
• Jan 25: Sale: 60 units

Total sold = 40 + 60 = 100 units. Total available = 30 + 50 + 40 = 120 units.

For the first sale of 40 units:

• 30 from Jan 1 @ $50
• 10 from Jan 10 @ $50

Remaining after first sale: 40 units from Jan 10 @ $50, 40 units from Jan 20 @ $51.

For the second sale of 60 units:

• 40 from Jan 10 @ $50
• 20 from Jan 20 @ $51

COGS = (30*$50) + (10*$50) + (40*$50) + (20*$51) = $1500 + $500 + $2000 + $1020 = $5020

Ending Inventory: 120 total – 100 sold = 20 units remaining. These are from the Jan 20 purchase:

• 20 units from Jan 20 @ $51 = $1020 (40 – 20 = 20 remaining)

The cost of ending inventory using FIFO is $1020.

How to Use This Cost of Ending Inventory Using FIFO Calculator

1. Enter Purchase Layers: Start by entering the number of units and cost per unit for your oldest inventory purchase in “Layer 1”. Proceed to “Layer 2”, “Layer 3”, etc., for subsequent purchases in chronological order. If you have fewer than 5 layers, enter 0 for units and cost in the unused layer fields.
2. Enter Units Sold: Input the total number of units sold during the accounting period.
3. Calculate: Click the “Calculate” button (or the results will update automatically as you type).
4. Review Results:
   • Cost of Ending Inventory: The primary result shows the total value of your remaining inventory based on the cost of the most recent purchases.
   • Cost of Goods Sold (COGS): This is the cost attributed to the units sold, taken from the oldest inventory layers first.
   • Total Ending Inventory Units: The number of units remaining in stock.
   • Average Cost per Unit (Ending Inventory): The average cost of the items left in your inventory.
   • Table: The table details how many units were sold from each layer and what remains, along with their values.
   • Chart: The chart visually compares the total value of inventory you started with (or purchased), the COGS, and the value of your ending inventory.
5. Reset or Copy: Use “Reset” to clear and start over with default values, or “Copy Results” to copy the key figures to your clipboard.

This calculator helps you quickly perform the cost of ending inventory using FIFO calculation, providing clarity on your inventory valuation and COGS.

Key Factors That Affect Cost of Ending Inventory Using FIFO Results

• Inflation/Deflation: In periods of rising prices (inflation), FIFO results in a higher ending inventory value and lower COGS because older, cheaper items are assumed sold first. In deflation, the opposite occurs.
• Purchase Timing and Costs: The cost per unit and the quantity purchased in each batch directly impact which costs remain in ending inventory. More recent, higher-cost purchases will increase ending inventory value under FIFO during inflation.
• Volume of Sales: Higher sales volume will deplete more of the older inventory layers, potentially leaving only the most recent (and possibly more expensive) items in ending inventory.
• Inventory Layers: The number of different purchase batches (layers) at different costs will affect the complexity and the final valuation. More layers with varying costs lead to more distinct cost pools.
• Spoilage and Obsolescence: Although FIFO assumes the oldest goods are sold, if there’s significant spoilage of older stock that isn’t actually sold, it can distort the physical vs. cost flow alignment, though FIFO accounting would still proceed as if they were sold first before being written off if unsellable.
• Accounting Period Length: The frequency of inventory valuation (e.g., monthly vs. annually) can influence the layers considered within the period and thus the ending inventory calculation. For more on inventory systems, see our inventory management guide.

Frequently Asked Questions (FAQ)

Q1: Why use FIFO?

A1: FIFO often matches the actual physical flow of goods, especially for perishable items. It’s also straightforward to apply and is widely accepted under GAAP and IFRS. In inflationary periods, it tends to report higher profits, which can be seen positively but may lead to higher taxes.

Q2: Is FIFO always better than LIFO or Weighted Average?

A2: Not necessarily. The “best” method depends on the business’s inventory flow, industry, and financial reporting goals. LIFO is not permitted under IFRS. The weighted-average method smooths out price fluctuations. Compare methods in our accounting methods comparison.

Q3: How does FIFO affect taxes during inflation?

A3: During inflation, FIFO results in a lower COGS and higher taxable income compared to LIFO, potentially leading to higher income taxes.

Q4: What if I sell more units than I have in the oldest layer?

A4: FIFO dictates that you fully exhaust the oldest layer, then move to the next oldest layer, and continue this until all units sold are accounted for across the layers.

Q5: Does FIFO reflect the current cost of inventory on the balance sheet?

A5: Yes, because the ending inventory consists of the most recently purchased items, its value on the balance sheet tends to be closer to current market values compared to LIFO, especially during inflation. Learn more about the balance sheet.

Q6: Can I switch between FIFO, LIFO, and weighted-average methods?

A6: Companies generally need to stick with one inventory valuation method for consistency, but changes can be made if justified and properly disclosed, following accounting standards.

Q7: What is the impact of FIFO on Cost of Goods Sold (COGS)?

A7: With FIFO, COGS is based on the cost of the oldest inventory. If prices are rising, COGS will be lower than if calculated using LIFO or weighted average. See our guide on understanding COGS.

Q8: What happens if costs are decreasing?

A8: If costs are decreasing (deflation), FIFO will result in a higher COGS and lower ending inventory value compared to LIFO.

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