Inventory Cost Valuation

Description

Inventory includes raw materials, work-in-progress, and finished goods. The way firms value their
stock has a direct impact on the costs of goods sold, inventory ending value, and hence overall
profitability.
This template illustrates how inventory purchase prices affect inventory costs, under three different
cost flow methods:
• First-In, First-Out (FIFO)
• Last-In, First-Out (LIFO)
• Weighted Average Cost (WAVCO)

In Scenario 1 - we calculate and compare COGS, Gross Profit, and Inventory Closing Balance under
the assumption of rising prices (inflationary environment).
In Scenario 2 - we calculate and compare COGS, Gross Profit, and Inventory Closing Balance under
the assumption of falling prices (deflationary environment).

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Scenario 1
Inventory cost
Inflationary environment

Quantity Price Value

Inventory flows (# of items) (per item) (in USD)
1st January (Beginning Inventory) - - -
April 1st 500 13.70 6,850
June 15th 400 15.00 6,000
July 10th 600 20.50 12,300
October 1st 400 22.50 9,000
December 20th 1,100 23.50 25,850
Total purchases 3,000 20 60,000

FIFO

Quantity Price Value

(# of items) (per item) (in USD)
Sales 2,000 50 100,000
(6,850) 500@13.7
(6,000) 400@15
(12,300) 600@20.5
(9,000) 400@22.5
(2,350) 100@23.5
COGS (2,000) (18.25) (36,500)
Gross profit 63,500

Inventory balance 1,000 23.50 23,500

Weighted average cost (WAVCO)

Quantity Price Value

(# of items) (per item) (in USD)
Sales 2,000 50 100,000
(10,000) 500@20
(8,000) 400@20
(12,000) 600@20
(8,000) 400@20
(22,000) 100@20
COGS (2,000) (20.00) (40,000)
Gross profit 60,000

Inventory balance 1,000 20.00 20,000

LIFO

Quantity Price Value

(# of items) (per item) (in USD)
Sales 2,000 50 100,000
(25,850) 1,100@23.5
(9,000) 400@22.5
(10,250) 500@20.5

COGS (2,000) (22.55) (45,100)

Gross profit 54,900

Inventory balance 1,000 14.90 14,900

Scenario 2
Inventory cost
Deflationary environment

Quantity Price Value

Inventory flows (# of items) (per item) (in USD)
1st January (Beginning Inventory) - - -
April 1st 500 23.20 11,600
June 15th 400 21.40 8,560
July 10th 600 20.00 12,000
October 1st 400 19.00 7,600
December 20th 1,100 18.40 20,240
Total purchases 3,000 20 60,000

FIFO

Quantity Price Value

(# of items) (per item) (in USD)
Sales 2,000 50 100,000
(11,600) 500@23.2
(8,560) 400@21.4
(12,000) 600@20
(7,600) 400@19
(1,840) 100@18.4
COGS (2,000) (20.80) (41,600)
Gross profit 58,400

Inventory balance 1,000 18.40 18,400

Weighted average cost (WAVCO)

Quantity Price Value

(# of items) (per item) (in USD)
Sales 2,000 50 100,000
(10,000) 500@20
(8,000) 400@20
(12,000) 600@20
(8,000) 400@20
(22,000) 100@20
COGS (2,000) (20.00) (40,000)
Gross profit 60,000

Inventory balance 1,000 20.00 20,000

LIFO

Quantity Price Value

(# of items) (per item) (in USD)
Sales 2,000 50 100,000
(20,240) 1,100@18.4
(7,600) 400@19
(10,000) 500@20

COGS (2,000) (18.92) (37,840)

Gross profit 62,160

Inventory balance 1,000 22.16 22,160

Summary
Inventory costs

Scenario 1 Scenario 2
(rising prices) (falling prices)
Weighted Weighted
FIFO average LIFO FIFO average LIFO
COGS (36,500) (40,000) (45,100) (41,600) (40,000) (37,840)
Gross profit 63,500 60,000 54,900 58,400 60,000 62,160

Inventory balance 23,500 20,000 14,900 18,400 20,000 22,160