FIFO and weighted average cost formulas

Learning objectives

• Explain that the cost of other inventories is assigned using the first-in, first-out or weighted average cost formula, and that the same formula is used for all inventories having a similar nature and use.L1, L2
• Calculate the cost of issues and of closing inventory under FIFO and under the weighted average cost formula.L1, L2, L3
• Recognise the cost of sales resulting from the formula used.L2

Normative references

• IAS 2 §25For inventories other than those dealt with in paragraph 23, cost is assigned by using the first-in, first-out (FIFO) or weighted average cost formula. An entity uses the same cost formula for all inventories having a similar nature and use to the entity; for inventories with a different nature or use, different cost formulas may be justified.
• IAS 2Inventories of the same type may have a different use in different operating segments, which may justify different cost formulas. However, a difference in geographical location of inventories (or in the respective tax rules) is not, by itself, sufficient to justify the use of different cost formulas.
• IAS 2 §27The FIFO formula assumes that the items of inventory that were purchased or produced first are sold first, so that the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of the period and of those purchased or produced during the period; the average may be calculated on a periodic basis or as each additional shipment is received, depending on the circumstances of the entity.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

18 questions

• Chantiers Navals d'Iroise is considering the specific identification of costs. Which statements are correct?L2
• Automobiles Ardoise sells used vehicles, each identified by its serial number and acquired at a price negotiated individually with private sellers. To simplify inventory record-keeping, its finance director proposes measuring all vehicles at weighted average cost. Which position should be taken?L2
• Quincaillerie Bastide holds 2 million identical bolts bought at different prices during the year. It may apply specific identification and designate as sold the batches bought at the lowest price in order to improve its profit.L2
• Helioterra buys 500 standard solar panels. On receipt, 120 of them are labelled and segregated in an area reserved for the construction of a solar plant ordered by a specific customer; the other 380 join the general inventory, where they are mixed with previous deliveries. How should the cost of these panels be assigned?L2
• Bijouterie Saint-Amand holds unique pieces made by designers, each acquired at its own price, as well as standard silver chains bought by the thousand at varying prices. Which approach to assigning cost complies with IAS 2?L2
• Why is specific identification inappropriate for an inventory comprising a large number of items that are ordinarily interchangeable?L1
• An entity may assign the cost of its interchangeable inventories using the last-in, first-out (LIFO) method, provided it applies it consistently.L1
• Épices Marivel applies first-in, first-out (FIFO). What does the cost of its closing inventory correspond to?L1
• Alvéa Distribution is reviewing the cost formulas for its inventories. Which statements are correct?L2
• Papeteries Lorvel measures its reams of paper using first-in, first-out (FIFO). For March 20X1: opening inventory of {opening_qty} reams at a unit cost of {opening_unit_cost}; purchase of {purchase_qty} reams at a unit cost of {purchase_unit_cost}; sales of {sold_qty} reams. Calculate the cost of sales for the month and the cost of closing inventory.L1
• The lubricant distributor Hydrovane tracks its drums of industrial oil on a FIFO basis. It held {opening_qty} drums at {opening_unit_cost} each at the start of 20X1, received {march_qty} at {march_unit_cost} in March and then {september_qty} at {september_unit_cost} in September, and sold {sold_qty} over the year. What is the cost of the drums sold and that of the drums remaining in inventory at the reporting date?L2
• The trader Cafés Torrélia resells green coffee in bags and applies weighted average cost, calculated over the whole period. For 20X1: opening inventory of {opening_qty} bags at {opening_unit_cost} per bag; purchases of {purchase_qty} bags at {purchase_unit_cost} per bag; sales of {sold_qty} bags. Calculate the weighted average unit cost, the cost of sales and the cost of closing inventory.L2
• Jardins Elvire, a wholesaler of garden furniture, assigns the cost of its garden sets using an annual weighted average. At 1 January 20X1, it held {opening_qty} sets valued at {opening_unit_cost} each; it bought {april_qty} at {april_unit_cost} in April and {october_qty} at {october_unit_cost} in October. Deliveries to customers during the year cover {issued_qty} sets. Determine the average unit cost for the year, the cost of the sets sold and the value of inventory at 31 December 20X1.L2
• Optique Brévalan keeps a perpetual inventory of its progressive lenses and recalculates weighted average cost at each new receipt. Movements for the quarter, in order: opening inventory of {opening_qty} units at {opening_unit_cost}; purchase of {purchase1_qty} units at {purchase1_unit_cost}; sale of {sale1_qty} units; purchase of {purchase2_qty} units at {purchase2_unit_cost}; sale of {sale2_qty} units. Calculate the cost of sales for the quarter and the cost of closing inventory.L3
• Céramiques Ondaine resells earthenware tiles and applies weighted average cost calculated over the period. For 20X1: opening inventory of {opening_qty} boxes at {opening_unit_cost}; purchases of {purchase_qty} boxes at {purchase_unit_cost}; sales of {sold_qty} boxes. Revenue has already been recognised. Record the entry recognising the cost of sales for the year.L2
• The building materials trader Saint-Clar Bâtiment measures its concrete blocks using FIFO. During the quarter, it sold {sold_qty} blocks; at the start of the quarter it held {opening_qty} blocks valued at {opening_unit_cost} each and it bought {purchase_qty} at {purchase_unit_cost} each. The sales have already been recorded as revenue. Which entry recognises the cost of the blocks sold?L2
• The accountant of Verrerie Ambrine, which applies FIFO, calculated the cost of sales for the month as follows: opening inventory of 1,000 bottles at 6, purchase of 1,000 bottles at 8, sales of 1,200 bottles; cost of sales used = 1,000 × 8 + 200 × 6 = 9,200. What error did he make?L2
• Nordelia distributes identical spare parts, intended for the same use, from two warehouses: one in Lyon, the other in its Seville branch. The Lyon accounting department applies FIFO; the Seville one applies weighted average cost, considered more advantageous under local tax rules. What conclusion should be drawn for Nordelia's financial statements?L2