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FIFO (First In, First Out) and Wedges

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How does the FIFO method differ from the average costing method of process costing system? Could you provide an example in your explanation?

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The solution discusses how the FIFO method differs from the average costing method of process costing system?

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The FIFO method of costing inventory, which stands for First In - First Out, is a system that tracks inventory coming and going by always assuming that the remaining inventory is that which was acquired last. Anything that is sold, is the oldest remaining inventory for costing purposes. The average costing method, on the other hand, assumes costs of goods sold is based on the average cost of the goods available for sale during the period.

Here's an example of FIFO. Assume Widgets 'R Us has 0 inventory to start 2012. Now it makes a purchase of 10 widgets for $2 in January. In February, it buys ...

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Robert Reinhart, MBA
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  • MBA, Merage School of Business, Univ of Cal, Irvine
  • BA, Univ of Cal, Irvine
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