Is the ending inventory higher using FIFO or the weighted average method Why?

The weighted average cost method is an accounting approach to inventory valuation, it is used to determine the cost of goods sold (COGS) and the ending inventory stock.

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Periodic weighted average cost method
Perpetual weighted average cost
The implications of the weighted average cost method
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First-In, First-Out (FIFO)
Last-In, First-Out (LIFO)
Choosing the Right Inventory Management Approach
Why ending inventory is higher in FIFO?
Which method is better FIFO or weighted average?
Which costing method gives the higher ending inventory Why?
What method provides the highest ending inventory?

Weighted average accounting assumes that all units are valued at a weighted average cost per unit, and it applies this calculated average to the COGS in addition to the units held in ending inventory.

The calculations used in the average cost method depend on whether the business is using a periodic or a perpetual inventory system.

Periodic inventory as an inventory valuation method relies on a physical inventory count undertaken at set times. In the periodic inventory system, the COGS is not ascertained until the end of the accounting period.
The perpetual system continuously updates inventory whenever a purchase is made from suppliers or a product is sold to a customer. Any time an item has been returned due to damage or defect or where cash discounts have been applied, an adjustment is made.

Periodic weighted average cost method

Under a periodic inventory system, the average cost method calculations are carried out at the end of the accounting period, with the weighted average cost based on the cost of the beginning inventory plus all purchases made during that period. This average cost per unit is then applied to the units sold and the units held in inventory.

Using the average cost method, the total cost of goods available for sale is averaged and any two units are sold at the average cost.

A business using the periodic inventory accounting system can ignore the fact that a sale can occur at the beginning of a month before final purchases at the end of that same month. Beginning inventory and purchases are simply combined to calculate the weighted average unit cost using the average cost formula.

Perpetual weighted average cost

In contrast to the periodic method, the perpetual inventory system records transactions continuously and average cost method calculations are carried out during the accounting period whenever a purchase or sale takes place.

The weighted average cost per unit is based on the cost of the beginning inventory and the purchases up to the point at which a sale takes place. This process is sometimes referred to as the moving average cost method.

In the weighted average perpetual inventory system, purchases and sales are dealt with in chronological order and a weighted average unit cost calculation is needed every time a sale is made. Because the weighted average is continually calculated, the perpetual inventory average cost method is sometimes referred to as the moving average cost method.

The implications of the weighted average cost method

Implications of using the weighted average cost method for inventory are that when prices rise, COGS are less than that acquired under the Last in First Out (LIFO) method, but more than that acquired under First in Last Out (FIFO). When comparing the two alternatives, inventory stock is not as badly understated as under LIFO, but it is not as current under FIFO. Weighted-average costing, on the other hand, takes a middle-of-the-road approach.

Businesses can bias reported income under the average cost method by buying or not buying inventory stock near the end of the financial year. Conversely, the averaging process reduces the effects of whether a company buys or does not buy stock.

The various inventory costing methods involve assumptions about how costs flow through a business. In some cases, assumed cost flows may agree with the actual physical flow of stock. Although physical flows can be declared in support for a specific inventory method, it is recognised that an inventory method’s assumed cost flows don’t necessarily correspond with the actual physical flow of the goods.

What is agreed, is that the inventory valuation approach you use will impact directly on the profit, tax and closing inventory of your company!

LIFO and FIFO are some of the most recognizable accounting terms in the industry, even if their meaning is unclear. FIFO, LIFO, and weighted average are concepts that apply to businesses who carry inventory, like manufacturers and retailers.

At the beginning of a period, you have lots of inventory that is ready to be sold to customers. You may also buy or create more inventory in that time. At the end of the period, customers have presumably scooped up some of that inventory and some of it remains. That’s when you’ll analyze your sales and your remaining inventory to calculate Cost of Goods Sold (COGS) and Ending Inventory.

COGS shows you how much the inventory that you sold to customers ended up costing you. Ending Inventory tells you how much the inventory that you currently have on hand is worth. Because the cost of materials can change and fluctuate, it’s important that you use the same inventory reporting method to calculate these.

For example, if you’re make tents, the cost of the fabric you purchase could go up or down over time. The tents that you made at the beginning of the month that are still in the warehouse could cost less to make than the ones that you are manufacturing at the end of the month. When a customer goes to your website and places an order, they see no difference between the two tents. But your accountant cares if you sold a tent that cost $30 to make vs. a tent that cost you $35 to make. This is where FIFO, LIFO, and weighted average come in. They provide some standard processes for managing inventory and tracking costs. This comes in handy when you start to analyze your inventory and need accurate data to help you.

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First-In, First-Out (FIFO)

Under FIFO rules, COGS is calculated using the cost of your inventory at the beginning of the period. In other words, if a customer places an order for your tent, the $30 tents are sold through first. They were made first, so they get shipped out first.

Your ending inventory, or what’s left at the end of the period, then is made up of $35 tents. This vastly oversimplifies the process, but it shows the importance of using a consistent process in order to get accurate numbers.

Last-In, First-Out (LIFO)

LIFO flips FIFO on its head and calculates COGS using the cost of inventory at the end of the period. Under this process, you would sell through your $35 tents first, even though they were made last. This would leave your older inventory (and the costs associated with making those items) in inventory longer.

In most cases, this way of managing inventory doesn’t make much sense. So it’s not as commonly used as FIFO or weighted average, which we’ll cover next.

The weighted average approach, as its name implies, takes an average of the costs throughout the period. If half of your inventory cost you $30 to make and the other half cost you $35, the weighted average approach would use $32.50 to calculate both the COGS and ending inventory calculations.

Many online inventory management systems use the weighted average approach. Some more sophisticated options allow for FIFO or LIFO.

Choosing the Right Inventory Management Approach

While there may be uses for each of these inventory management methods, the reality is that most businesses will use FIFO. It’s the easiest calculation and the most logical approach, so unless there is a strong reason for using LIFO or weighted average, FIFO is the default.

If you sell high volumes of small items, like nails and screws for example, and the costs change regularly, weighted average may make more sense. However, if you have a complicated inventory, using an inventory system that can match your selling practices and calculate all of this for you will be key. If you have a pretty simple inventory, FIFO will make the most sense.

Why ending inventory is higher in FIFO?

Bertie had 300 bars left over—the same amount she sold. But when using the first in, first out method, Bertie's ending inventory value is higher than her Cost of Goods Sold from the trade show. This is because her newest inventory cost more than her oldest inventory.

Which method is better FIFO or weighted average?

FIFO vs Weighted Average Weighted average method uses the average inventory levels to calculate inventory value. FIFO is the most commonly used inventory valuation method. Usage of weighted average method is less compared to FIFO. Inventory will be issued from the oldest available batch.

Which costing method gives the higher ending inventory Why?

Based on the table above, FIFO gives the highest cost for ending inventory. Since the cost of inventory increases the later date the company purchases goods, the inventory with higher costs forms part of the ending inventory.

What method provides the highest ending inventory?

Under FIFO, you assign inventory costs in purchase date sequence. Because FIFO has you subtract the cost of your oldest -- and therefore least expensive -- inventory from sales, your gross income is higher.