FIFO, LIFO & Weighted Average Methods

  • FIFO – First In, First Out
  • LIFO – Last In, First Out

  • Weighted Average Method

FIFO, LIFO & Weighted Average Methods

Inventory costing methods help businesses decide how much expense to record when items are sold. When you buy the same product at different prices over time, which cost should you use when one is sold? That’s where FIFO, LIFO, and Weighted Average come in.

“Inventory methods determine how the cost of goods sold (COGS) and the value of remaining inventory are calculated.”
 Let’s look at each one simply.

1. FIFO – First In, First Out

FIFO, which stands for "First In, First Out," means that the oldest inventory items are sold first. In this method, the cost of the earliest purchases is recorded as the Cost of Goods Sold (COGS), while the more recent purchases remain in inventory. For example, if you buy 100 units at $5 each and then another 100 units at $6, and you sell 100 units, FIFO assumes those sold items came from the $5 batch. This means your COGS would be 100 × $5 = $500. FIFO is especially useful during times of rising prices because it results in lower costs recorded, which in turn shows higher profit on financial statements.

2. LIFO – Last In, First Out

LIFO, or "Last In, First Out," means the most recently purchased inventory is sold first. This method assigns the latest costs to the Cost of Goods Sold (COGS), while the older inventory remains in stock. Using the same example—if you purchase 100 units at $5 and another 100 units at $6, and then sell 100 units—LIFO assumes the sale comes from the $6 batch. So, your COGS would be 100 × $6 = $600. In times of rising prices, LIFO results in higher COGS and therefore lower reported profit. Although it's still used in the United States, LIFO is not permitted under IFRS standards used in many other countries.

3. Weighted Average Method

The Weighted Average Method calculates the cost of inventory by averaging the cost of all units available, regardless of when they were purchased. This means that every item is valued at the same average price. For example, if you buy 100 units at $5 and another 100 units at $6, the total cost is $1,100 for 200 units. The average cost per unit would be ($500 + $600) ÷ 200 = $5.50. So, if you sell 100 units, your COGS would be 100 × $5.50 = $550. This method is helpful for businesses that deal with large volumes of similar items or when tracking individual inventory items is difficult. It also helps smooth out price fluctuations over time.

Key Takeaways 

✅ FIFO = Oldest items sold first → Lower COGS, higher profit
✅ LIFO = Newest items sold first → Higher COGS, lower profit
✅ Weighted Average = Uses average cost → Smooths price fluctuations
✅ Each method affects profit, taxes, and inventory value differently
✅ Choose the method that fits your business type and reporting rules
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