 # How to Calculate FIFO

## FIFO Method Formula Definition

First In First Out (FIFO) is a method of asset management and valuation methods in which assets which are acquired first are sold first. Under FIFO, the cost of your oldest inventory is used in calculating COGS.

## Significance of FIFO Formula

The FIFO inventory method formula is considered one of the most trusted methods as it focuses on selling old items first. It offers benefits such as:

• Following a natural inventory flow: FIFO formula tends to keep the oldest stocks being cleared first and the accounting goes by the costs first. This makes bookkeeping more manageable and concise, with negligible mistakes.
• Least waste: The FIFO inventory method formula follows the least waste, using the oldest inventory first.
• Provides a better reflection of a market value: The remaining products in the inventory better reflect a market value. This is because the products have yet to be sold and have been built recently.
• Higher profits: Since the FIFO inventory method formula follows the first come first serve method, it ensures higher profits.

## Applications of FIFO Method Formula

FIFO method is affordable and helps to maintain a concise asset management procedure. The FIFO method formula holds the following application in an e-commerce business:

• It helps calculate COGS which is used to determine a company’s direct cost to manufacture products. It impacts the company’s profitability as well.
• It is used for cost flow assumption which is the process of moving the cost of a business’  product out of its inventory to its cost of goods sold
• FIFO formula provides accurate details on the inventory costing at a given time.

## FIFO Formula

### FIFO =

Cost of Oldest Inventory x Cost of the Number of Inventory Sold

## Definition of Each Element of FIFO Formula

• Cost of oldest inventory – It refers to the cost of the products companies purchased first out of the batch.
• Cost of number of inventory sold  – This defines the total cost of the number of goods sold from the inventory.

## Understanding with an Example

For example, X buys and resells tables. Here’s what it looks if X build up the inventory in the store:

Now, X sold 80 tables in April. So, COGS calculation using FIFO method is as follows,

= 80 x  ₱50

=  ₱4000

## Inference

FIFO method formula helps e-commerce businesses value inventory and calculate the COGS value.