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9.6 The First In First Out (FIFO) system

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VCE Accounting Unit 3. Video of this presentation can be found on my YouTube channel here https://www.youtube.com/channel/UCf5jyuJoYwie8tWfvjEc0zg.

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9.6 The First In First Out (FIFO) system

  1. 1. 9.6 THE FIRST IN FIRST OUT (FIFO) SYSTEM
  2. 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. 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. 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. 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. 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. 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. 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. 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. 10. © Michael Allison, Trinity Grammar School. Author’s permission required for external use TASK In-class Homework Ex9.4 X

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