FIFO is the acronym for First-In, First-Out. It is a cost flow assumption usually associated with the valuation of inventory and the cost of goods sold. Under FIFO, the oldest costs will be the first costs to be removed from the balance sheet account Inventory and will be the first costs to be included in the cost of goods sold on the income statement.
The weighted average method is used to assign the average cost of production to a product. Weighted average costing is commonly used in situations where:
- Inventory items are so intermingled that it is impossible to assign a specific cost to an individual unit.
- The accounting system is not sufficiently sophisticated to track FIFO or LIFO inventory layers.
- Inventory items are so commoditized (i.e., identical to each other) that there is no way to assign a cost to an individual unit
FIFO differs from Weighted Average method in process costing as it is based on a different assumption regarding opening inventory:
- Weighted Average assumes that opening work in progress (WIP) inventory merges with units introduced during the current period and cannot be separately identified.
- The Weighted Average method calculates the cost per unit by totalling the cost of opening WIP inventory and the costs incurred during the period and dividing this total by the total number of equivalent units (i.e. number of units introduced during the period plus the equivalent number of units of closing WIP inventory).
- FIFO assumes that the opening WIP inventory in a process is the first group/batch of units to be completed in the current period and is separate from the units introduced and processed during the current period.
- FIFO charges the cost of opening WIP inventory separately to completed production and the cost per unit is based OnlY on the current period costs and production for the current period. Closing WIP inventory is assumed to be from the units introduced during the current period