Fam, y’all ever heard of FIFO, LIFO, Average Cost, and Weighted Average Cost methods? If you haven’t, lemme break it down for you.
FIFO or First in First Out Method
FIFO is a method used to calculate the cost of goods sold, where the first items purchased are the first items sold. This means that the cost of the goods sold is based on the cost of the oldest inventory. This method is often used in industries where the products have a short shelf life, like food and beverage.
LIFO or Last in First Out Method
LIFO is a method used to calculate the cost of goods sold, where the newest items purchased are the first items sold. This means that the cost of the goods sold is based on the cost of the latest inventory. This method is often used in industries where the products have a longer shelf life and where the cost of goods sold tends to increase over time.
Average Cost Method
The average cost method calculates the cost of goods sold based on the average price of the inventory. This method is determined by dividing the total cost of the inventory by the number of units in stock. This is often used when the inventory fluctuates in price.
Weighted Average Cost Method
The weighted average cost method calculates the cost of goods sold based on the average price of the inventory, but gives more importance to the most recent transactions. This method is often used when the inventory has a large variation in price over time.
So there you have it, those are the basic accounting methods used to calculate the cost of goods sold. Make sure you understand which method is best for your business, and you’ll be on the right track to financial success.
Stay woke, fam.
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