Understanding FIFO (First-In-First-Out)
In inventory management, the FIFO (First-In-First-Out) method determines how goods are sold and accounted for. This approach assumes that the oldest inventory items purchased are sold first.
Example Scenario
Let’s consider a practical example to illustrate how FIFO works.
Purchases
- March 15, 2025: Purchased 100 water bottles at ₹20 each.
- April 5, 2025: Purchased 100 water bottles at ₹25 each.
Sales
On May 10, 2025, 150 water bottles were sold at ₹40 each.
FIFO Calculation
Under the FIFO method, we consider the first stock purchased will be sold first.
- First 100 Bottles:
- Sold from the March 15th batch.
- Cost: 100 bottles×₹20=₹2,000100 bottles×₹20=₹2,000
- Next 50 Bottles:
- Sold from the April 5th batch.
- Cost: 50 bottles×₹25=₹1,25050 bottles×₹25=₹1,250
Total Cost of Goods Sold (COGS)
The total COGS can be calculated as follows:
Total COGS=₹2,000 (from March 15th)+₹1,250 (from April 5th)=₹3,250
Total Sales Revenue
The total revenue from the sale of 150 water bottles is:
Total Sales=150 bottles×₹40=₹6,000
Gross Profit Calculation
To determine the gross profit, we subtract the total COGS from the total sales revenue:
Gross Profit=Revenue−Cost of Goods Sold=₹6,000−₹3,250=₹2,750