What is the practical FAR difference between FIFO and weighted-average inventory costing?

Question

AcadiFi · Accepted Answer

FIFO assigns the oldest costs to cost of goods sold and leaves the newest costs in ending inventory. Weighted-average blends all available unit costs into one average cost per unit. In a rising-price environment, FIFO usually reports lower cost of goods sold and higher ending inventory than weighted-average, which means higher gross profit and higher current ratio.

Example: Larkstone Appliances buys 100 mixers at $40, then 100 more at $46. It sells 150 units. Under FIFO, cost of goods sold is 100 x $40 plus 50 x $46 = $6,300, and ending inventory is 50 x $46 = $2,300. Under weighted-average, total cost is $8,600 for 200 units, so average cost is $43.00. Cost of goods sold is 150 x $43 = $6,450, and ending inventory is 50 x $43 = $2,150. Compared with weighted-average, FIFO shows $150 lower cost of goods sold and $150 higher ending inventory.

That difference flows directly into gross profit, net income, and ratios. The exam trap is forgetting that the physical flow of goods does not need to match the accounting cost flow. Think of FIFO and weighted-average as cost assumptions only. If prices are falling, the pattern reverses. Practice more in our CPA FAR question bank.

What is the practical FAR difference between FIFO and weighted-average inventory costing?

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