The difference between the two depends on the way the inventory is issued one method sells the goods purchased first (FIFO) and the other calculates the average price for the total inventory (weighted average). While both FIFO and weighted average are popular inventory valuation methods, companies can decide which method to use based on their discretion. Inventory will be averaged out to arrive at a price. Inventory will be issued from the oldest available batch. Usage of weighted average method is less compared to FIFO. Weighted average method uses the average inventory levels to calculate inventory value.įIFO is the most commonly used inventory valuation method. What is the difference between FIFO and Weighted Average? FIFO vs Weighted AverageįIFO is an inventory valuation method where the first purchased goods are sold first. Thus, this does not provide a perfectly accurate valuation. Another disadvantage of this method is that when the average value of inventory is divided by the number of units, this often results in an amount with decimal points that has to be rounded up/down to the nearest whole number. However, the issue of inventory may not reflect the prevailing economic values. Further, this is a convenient and simple method of inventory valuation. The main advantage of weighted average method is that it evens out effects of widely varying prices due to the average use of price. This helps to arrive at a value that does not represent oldest or latest units. This method values inventory by dividing the cost of the goods available for sale by the number of goods, thus calculating an average cost. Consider the following purchases and related prices for the month of March. is a bookstore that sells study material (books) to universities. In most companies, this is very similar to the actual flow of goods thus, FIFO is considered to be the most theoretically accurate inventory valuation system among others.Į.g. Side by Side Comparison – FIFO vs Weighted AverageįIFO operates under the principle which states that first purchased goods are the ones that should be sold first. The key difference between FIFO and weighted average is that FIFO is an inventory valuation method where the first purchased goods are sold first whereas weighted average method uses the average inventory levels to calculate inventory value.Ĥ. Proper valuation of inventory is essential to show effective results in financial statements. Inventory is one of the most vital current assets and some companies operate with significant amounts of inventories. Key Difference – FIFO vs Weighted AverageįIFO (First in First Out) and weighted average method are inventory valuation methods.
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