The document explains the First In First Out (FIFO) inventory management system, where the first goods purchased by a firm are assumed to be the first sold. It illustrates how different unit costs of sold stock can lead to varying cost of sales depending on which items are selected for sale, highlighting the importance of accurate stock management. The FIFO method simplifies inventory management by providing a consistent approach to calculating costs associated with sales.

1. 9.6
THE FIRST IN FIRST
OUT (FIFO) SYSTEM

2. © Michael Allison, Trinity Grammar School. Author’s permission required for external use
 What if the business had the
following stock in its
storeroom?
 How do you know which unit
was sold? A $200 unit? A $210
unit? A $220 unit?
 So far, the cost of sale amount has
been given to you for each
transaction. E.g. from your
previous SACs:
 “The firm 1 unit of stock for $400
plus $40 GST (cost of sale $200)”
 In the real world, how did the firm
arrive at a cost price of $200 for
this sale?
9.6 THE FIRST IN FIRST OUT (FIFO) SYSTEM
Stock room for storing inventory
$200
$200
$200
$200
$200
$210
$210
$210$220
$220
$220
$220
$220
$220
$220

3. © Michael Allison, Trinity Grammar School. Author’s permission required for external use
 A system is needed to record the different stock that comes in…
Store room for storing stock
March 1st – the firm buys 5 units of
stock at $200 each
$200
$200
$200
$200
$200
March 9th – the firm buys 3 units of
stock at $210 each
$210
$210
$210
March 16th – the firm buys 7 units
of stock at $220 each
$220
$220
$220
$220
$220
$220
$220
9.6 THE FIRST IN FIRST OUT (FIFO) SYSTEM

4. © Michael Allison, Trinity Grammar School. Author’s permission required for external use
 The firm now has 15 units of stock at a range of costs
 On March 20th, a customer comes in and pays $1,100 plus $110 GST for 3
units of stock. What is the cost of this sale to the business?
Stock room for storing inventory
$200
$200
$200
$200
$200
$210
$210
$210
$220
$220
$220
$220
$220
$220
$220
• It depends on which 3 units
of stock the salesperson
grabs
• This is easy to determine if
stock is stored neatly and
accurately
• In reality, all these units
look the same and the
salesperson could grab any
3 units
$200
$200
$200
$200
$200
$210
$210
$210$220
$220
$220
$220
$220
$220
$220
$200
$200
$200
$200
$200
$210
$210
$210$220
$220
$220
$220
$220
$220
$220
• In this instance, the
salesperson has grabbed
$220 + $210 + $200 of
stock, meaning the cost of
sale is $630
9.6 THE FIRST IN FIRST OUT (FIFO) SYSTEM

5. © Michael Allison, Trinity Grammar School. Author’s permission required for external use
 But the salesperson could just as easily grab a different set of 3
units
Stock room for storing inventory
$200
$200
$200
$200
$200
$210
$210
$210$220
$220
$220
$220
$220
$220
$220
 The cost of sale is $660
9.6 THE FIRST IN FIRST OUT (FIFO) SYSTEM

6. © Michael Allison, Trinity Grammar School. Author’s permission required for external use
 But the salesperson could just as easily grab a different set of 3
units
Stock room for storing inventory
$200
$200
$200
$200
$200
$210
$210
$210$220
$220
$220
$220
$220
$220
$220
 The cost of sale is $620
9.6 THE FIRST IN FIRST OUT (FIFO) SYSTEM

7. © Michael Allison, Trinity Grammar School. Author’s permission required for external use
 Each situation involved the sale of 3 units but each resulted in a
different cost of sales…
 Which figure is correct?
$220 $210 $200
$220 $220 $220
$200 $210 $210
Situation #1
Situation #2
Situation #3
=
=
=
Cost of sale
$630
$660
$620
Answer: it’s too difficult
to calculate so it
doesn’t matter
9.6 THE FIRST IN FIRST OUT (FIFO) SYSTEM

8. © Michael Allison, Trinity Grammar School. Author’s permission required for external use
 Because a firm has hundreds (sometimes thousands) of units of stock
going in and out of the business in any one month, it can be nearly
impossible to figure what each unit cost
Stock room for storing inventory
• To reduce this confusion, we use
a cost identification method
called First in First Out (FIFO)
• Under FIFO, we assume that the
first goods purchased by the
firm are the first goods leaving
the business.
$200
$200
$200
$200
$200
Mar 1st
$210
$210
$210
Mar 9th
$220
$220
$220
$220
$220
$220
$220
Mar 16th
9.6 THE FIRST IN FIRST OUT (FIFO) SYSTEM

9. © Michael Allison, Trinity Grammar School. Author’s permission required for external use
Stock room for storing inventory • Under FIFO, we assume that
the first goods purchased by
the firm are the first goods
sold
• March 20th, the firm sold 3
units
• Cost of sale $600
• March 24th, the firm sold 4
units
• Cost of sale $820• Cost of sale $430
$200
$200
$200
$200
$200
Mar 1st
$210
$210
$210
Mar 9th
$220
$220
$220
$220
$220
$220
$220
Mar 16th
• March 28th, the firm sold 2
units
Quantity Cost Value
5 200 1000
3 210 630
7 220 1540
Quantity Cost Value
2 200 400
3 210 630
7 220 1540
Quantity Cost Value
0 200 0
1 210 210
7 220 1540
Quantity Cost Value
0 200 0
0 210 0
6 220 1320
9.6 THE FIRST IN FIRST OUT (FIFO) SYSTEM

10. © Michael Allison, Trinity Grammar School. Author’s permission required for external use
TASK
In-class Homework
Ex9.4 X