After finishing college and moving out into the business world, you will be faced with many tasks one has to complete. Being in the real world, there is much less room for error. You can’t “have a bad quiz” because you didn’t study. You employer hired you to do a job and expects that job to be completed on time. Business tasks in the accounting field can include anything from calculating costs of goods sold (CGS), finding the depreciation of an asset, or managing your inventory costs.
Managing inventory is something not many people have any experience with unless you’ve taken some type of college level accounting class. When managing inventory, there are four main techniques to do this. The first, FIFO or first in, first out. The second being, LIFO or last in first out. The third technique is WAVG also called weighted average and the fourth technique used in managing inventory is called specific identification. I will go over the first three techniques I have mentioned. Specific inventory while still important is used mainly for very expensive items such as real property or housing.
FIFO, meaning first in first out, means just what it sounds like. The goods that are brought in for inventory first, are the first goods sold or disposed of. This also means that at the end of firms fiscal year, there inventory will be comprised of goods that have gotten there most recently. An example of this would be in the car business. Each year, new models are produced, typically there are available for sale around September. Managers know this and try to sell for example all their 2010 models before the 2011 models are available for sale.
The next method is called LIFO also known as last in, first out. This is the same concept of as FIFO but still differs. This simply means the latest goods in inventory are the ones sold first. Again this means at the end of a company’s financial year, their ending inventory will be made up of goods the company received prior to their most recent inventory. Using LIFO, the objective is to charge the cost of current purchases to work in process or other operating expenses and to leave the oldest costs in the inventory.
The final method is called weighted average. This is a “method in calculation in which the weighted average cost per unit for the period is the cost of the goods available for sale divided by the number of units available for sale” (Barron Education System). In this method, the order in which goods are purchased does not matter. The costs of the goods are averaged at the end of the year to find your cost of goods sold.
In the accounting world, it is very important how you manage your inventory. I have discussed three of the four main techniques used by companies today. The first, FIFO, first in first out. The second being LIFO or last in first out and lastly, the weighted average technique. All three techniques are different yet valuable in their own way. It is the firms responsibility to decided which method would best suit their company.