COST CALCULATION

METHODS. FIFO AND LIFO

he cost calculation methods
For accounting purposes For tax accounting purposes
• cost per unit valuation; • cost per unit valuation;
• average cost valuation; • average cost valuation;
• at the cost of the first time of • the method of evaluation by the cost
acquisition of inventory (FIFO of the first-time acquisitions (FIFO);
method). • the method of evaluation by the cost
of the last-time acquisitions (LIFO).

*The LIFO method has been excluded from the accounting rules since January 1, 2008 on the basis of the order of the Ministry of
Finance of the Russian Federation dated 26.03.2007 N 26n "On Amendments to regulatory legal acts on accounting"
 Cost per unit valuation method

•This method assumes that the cost of each specific product is taken into account in the
calculations
•Inventories used by the organization in a special order are evaluated, or inventories that cannot
replace each other in the usual way.
•This method is used in exceptional cases or with a small range of goods and materials. It is
characterized by a special labor intensity, provided that it is used in enterprises with a large
nomenclature.
•Such a system is used when trading unique and expensive goods, when accuracy is important. For
example, it is suitable for those who sell cars, art objects or jewelry.
 Average cost valuation method

•The calculation is based on the average cost by dividing the total cost of a group (type) of inventory by their
number, which consists of the cost price and the number of balances at the beginning of the month and inventory
received during the month. This method is the most common and is included in standard versions of accounting
software.

•This method of inventory write-offs suitable for companies selling products for which accounting per unit is not
important. This can be, for example, stationery, clothing, shoes, toys, cosmetics and any other consumer goods.
The method of average cost is especially beneficial for those goods, the price of which is constantly changing
both up and down.
 Average cost valuation method. How to
calculate
[average cost of inventory] = ([cost of inventory at the beginning of the month] + [cost
of inventory received during the month]) / ([number of inventory at the beginning of the
month] + [number of inventory received during the month])

The cost of inventory items written off per month is calculated as follows: [cost of
written off inventory] = [average cost of inventory] X [number of inventory sold per
month]
 •Standard (normal), assuming the calculation of incoming and
outgoing materials, and unused materials are counted once at the
end of the month;
FIFO Application •Modified (sliding), assuming the reverse order of calculations -
Models first, the balance of materials at a certain point in time is
determined at the price of the latest in time of purchase, and then
the cost of inventories written off into production is calculated.
LIFO “LAST IN,
FIRST OUT”

•The latest items to be stored are

the first items to be sold.
•The LIFO method is the opposite
of the FIFO method.
•In conditions of rising prices - the
minimum estimate of reserves and
profits.
•In the conditions of falling prices -
maximizing the valuation of stocks
and profits.
 •According to the law, the organization itself chooses
how to calculate the cost of goods.

Take a note
•Changes to the accounting policy can be made once a
year.