Definition of Fifo

The FIFO system is a short form of first in first out. This is a costing system that assumes an item that was bought first should be sold first. If a company is following FIFO basis to manage its inventory, then the oldest unit of production or purchase will be charged to the cost of goods sold first and the closing stock will contain unsold older units if any, and the most recently produced or purchased units.

For example, a company purchased 300 shaving kits for $20 each and sold 200 kits in May. In June the company purchased 250 kits for $25 each and sold 150 kits.

The FIFO basis says that the cost of goods sold in May will be $4000 ($20 x 200 kits) and $3250 ($20 x 100 kits + $25 x 50 kits) in June

Cost of goods sold in May = ($20 x 200 kits) = $4,000

Cost of goods sold in June = ($20 x 100 kits + $25 x 50 kits) = $3,250