Several methods exist for valuing inventory on hand. The university allows First-In, First-Out (FIFO) and Weighted Average methods. There are advantages and disadvantages to both, but each assigns a value to the goods remaining in inventory. The method chosen must be applied consistently from year-to-year. A change of method must be approved in writing by CCO. Contact your campus accountant if a change in method is under consideration or if you would like more information on either method. A brief description of each follows.
First In, First Out (FIFO)
The assumption under FIFO is that the items in inventory are sold or used in the order in which they are purchased. Thus, the first items acquired are assumed to be the first ones sold or used with their costs being transferred to Cost of Goods Sold (COGS) at the time of sale. Therefore, the items in the inventory are assumed to be those from the most recent purchases and would be priced at the cost of those recent purchases. Documentation showing the cost of those purchases should be maintained and easily accessible.
Weighted Average
The assumption under the weighted average method is that the average cost of the inventory is influenced or “weighted” by the number of units acquired at each price. It is computed by dividing the total cost of beginning inventory plus purchases, by the total number of units in these two categories, and then multiplying the result by the number of units in ending inventory. This method is generally associated with periodic inventories. Documentation supporting the average cost calculation of each inventory item should be maintained and easily accessible.
Total Cost of Beginning Inventory + Purchases = Total Dollar Amount
divided by
Beginning Inventory + Purchased Units = Total # of Units in Inventory