Corporate Accounting and Auditing · Inventories (Ind AS 2)

Cost Formulas under Ind AS 2: FIFO, Weighted Average, Standard Cost

Updated 10 October 2026 · Fact-checked

Ind AS 2 lets you assign cost to inventory using specific identification for unique items, and FIFO or weighted average for interchangeable items. LIFO is not allowed. Standard cost and the retail method are shortcuts, allowed only if the result approximates actual cost. To solve a question, pick the permitted formula, cost the closing stock, and take cost of goods sold as the balance.

Understand Cost Formulas and Techniques: FIFO, Weighted Average, Standard Cost

Once you know the cost of items bought or made, you must decide which cost goes to the units sold and which stays in closing stock. When prices change during the year, this choice changes profit and the value of stock on the balance sheet. Ind AS 2 therefore prescribes the cost formulas you may use.

Specific identification is used for items that are not ordinarily interchangeable, and for goods produced and segregated for specific projects. Think of a custom-built machine or a particular car in a showroom. Each item carries its own cost.

For all other inventories, which are ordinary interchangeable items, you use FIFO or weighted average. Under FIFO, the first units bought are assumed sold first, so closing stock carries the latest costs. Under weighted average, you divide the total cost of goods available by the total units available. The average can be worked out periodically or after each receipt (moving average). An entity must use the same cost formula for all inventories of a similar nature and use. Different formulas may be justified for inventories with a different nature or use.

LIFO is not permitted under Ind AS 2. It assumes the latest purchases are sold first, so closing stock is shown at old costs. That can leave inventory on the balance sheet far from recent cost, and it can be used to manage profit.

Two techniques are allowed for convenience, provided the result approximates cost. Standard cost uses normal levels of materials, labour, efficiency and capacity, and is reviewed regularly against current conditions. The retail method is used in retail businesses with many fast-changing items of similar margin. It converts selling price back to cost by reducing the sales value by an appropriate percentage of gross margin. An average percentage may be used for each retail department.

Key rules to remember

Cost formulas allowed: Specific identification | FIFO | Weighted average; Specific identification for non-interchangeable items and project goods. FIFO or weighted average for the rest. LIFO is not allowed.
Weighted average cost per unit: Total cost of goods available ÷ Total units available; In the periodic method, use the whole period's opening stock and purchases. In the moving method, recompute after every purchase.
FIFO closing stock: Closing units valued at the most recent purchase costs, working backwards; Cost of goods sold takes the oldest costs first.
Cost of goods sold: Opening stock + Purchases (cost) − Closing stock; Use the same costs consistently in all three figures.
Retail method: cost-to-retail ratio: (Opening stock at cost + Purchases at cost) ÷ (Opening stock at retail + Purchases at retail); This simple form assumes no markups or markdowns. Adjust the retail figures if the question gives them.
Retail method: closing stock at cost: Closing stock at retail × Cost-to-retail ratio; Closing stock at retail = Goods available at retail − Sales.
Standard cost condition: Standard cost is acceptable only if it approximates actual cost; Standards must be reviewed regularly and revised in light of current conditions.

How to solve Cost Formulas and Techniques: FIFO, Weighted Average, Standard Cost questions

Use this method for any question on cost formulas, whether the data is units and rates or retail prices.

1Read which method the question names. If it is not named, check whether the items are interchangeable. If they are not, use specific identification. If they are, choose FIFO or weighted average as asked.
2Reject LIFO if it appears, and state that Ind AS 2 does not permit it.
3List opening stock, each purchase and each issue in date order, with units and rates.
4Find units in closing stock: units available less units sold or issued.
5Value closing stock. For FIFO, take the latest purchases first. For weighted average, multiply closing units by the average rate.
6Find cost of goods sold as goods available at cost less closing stock. Check that closing stock plus cost of goods sold equals total cost available.
7For the retail method, find the cost-to-retail ratio, compute closing stock at retail, then convert it to cost.
8Add a one-line comment, such as which method gives higher profit when prices are rising, or whether standard cost is acceptable.

Quickest way: Total-cost check method

When to use it: Use this for FIFO and weighted average numericals when you have limited time, such as in the MCQ section.

Add up total units and total cost of goods available first.
For weighted average, divide the total cost by the total units and multiply by closing units.
For FIFO, value only the closing units from the latest purchases. Do not value the units sold.
Get cost of goods sold by subtraction from total cost.
In rising prices, FIFO shows higher closing stock and higher profit than weighted average. Use this to sense-check your answer.

Common mistakes in Cost Formulas and Techniques: FIFO, Weighted Average, Standard Cost

Using LIFO or treating it as an option.
LIFO is familiar from other textbooks and from foreign practice.
Fix: State clearly that Ind AS 2 does not permit LIFO. Only specific identification, FIFO and weighted average are cost formulas.
Valuing closing stock under FIFO from the oldest purchases.
Students confuse which units are assumed sold with which units remain.
Fix: Under FIFO, the oldest units are sold first, so closing stock comes from the latest purchases. Work backwards from the last purchase.
Using the simple average of purchase rates as the weighted average.
Averaging the rates is quicker than weighting them by units.
Fix: Divide total cost by total units. Never add the rates and divide by the number of lots.
Applying specific identification to ordinary interchangeable goods, or FIFO to a special project item.
Students memorise the formulas but not the conditions for each.
Fix: Check first whether the item is non-interchangeable or made for a specific project. If so, trace its own cost.
Computing the retail method ratio on retail prices alone, or using closing stock at retail as the answer.
The conversion from retail back to cost is forgotten.
Fix: Find the ratio of total cost to total retail, find closing stock at retail, then multiply by the ratio to get cost.
Saying standard cost is always acceptable.
Students remember that it is permitted but not the condition.
Fix: Write that it is allowed only if the result approximates cost, and only if standards are reviewed regularly against current conditions.

Worked examples

Example 1

Opening stock of a trader is 200 units at ₹50. Purchases are 300 units at ₹60 and then 500 units at ₹70. 700 units are sold during the period. Find closing stock and cost of goods sold under (a) FIFO and (b) periodic weighted average.

Show the solution

Total units available = 200 + 300 + 500 = 1,000. Closing units = 1,000 − 700 = 300.
Total cost available = 200 × 50 + 300 × 60 + 500 × 70 = 10,000 + 18,000 + 35,000 = ₹63,000.
FIFO: closing 300 units come from the latest purchase of ₹70. Closing stock = 300 × 70 = ₹21,000.
FIFO cost of goods sold = 63,000 − 21,000 = ₹42,000. Check: 200 × 50 + 300 × 60 + 200 × 70 = 10,000 + 18,000 + 14,000 = ₹42,000.
Weighted average rate = 63,000 ÷ 1,000 = ₹63 per unit.
Weighted average closing stock = 300 × 63 = ₹18,900. Cost of goods sold = 63,000 − 18,900 = ₹44,100.
Comment: prices rose, so FIFO gives higher closing stock and higher profit by ₹2,100 (21,000 − 18,900). LIFO is not permitted by Ind AS 2.

Answer: FIFO: closing stock ₹21,000 and cost of goods sold ₹42,000. Weighted average: closing stock ₹18,900 and cost of goods sold ₹44,100.

Example 2

A retail store has opening stock of cost ₹40,000 and retail value ₹60,000. Purchases during the period cost ₹3,20,000 and have a retail value of ₹4,40,000. Sales were ₹4,00,000. Assuming no markups or markdowns, find closing stock at cost under the retail method.

Show the solution

Goods available at cost = 40,000 + 3,20,000 = ₹3,60,000.
Goods available at retail = 60,000 + 4,40,000 = ₹5,00,000.
Cost-to-retail ratio = 3,60,000 ÷ 5,00,000 = 72%.
Closing stock at retail = 5,00,000 − 4,00,000 = ₹1,00,000.
Closing stock at cost = 1,00,000 × 72% = ₹72,000.
Cost of goods sold = 3,60,000 − 72,000 = ₹2,88,000. Check: 4,00,000 × 72% = ₹2,88,000.
Comment: the method is acceptable under Ind AS 2 for large numbers of fast-changing items with similar margins, where other costing methods are not practicable.

Answer: Closing stock at cost is ₹72,000 and cost of goods sold is ₹2,88,000.

Exam tips

In the MCQ section, expect questions on which cost formulas are permitted or which method is not allowed. Remember the list: specific identification, FIFO, weighted average. LIFO is out.
For numericals, always show goods available in units and in rupees before valuing closing stock. Step marks come from this layout.
Write the condition when naming a technique: standard cost and the retail method are allowed only if the result approximates cost.
In theory answers, give one reason why LIFO is rejected: closing stock is shown at old costs, which can leave inventory far from recent cost.
End a comparison question with a one-line effect on profit: in rising prices, FIFO shows higher profit than weighted average.

Practice questions from Inventories (Ind AS 2)

Cost Formulas and Techniques: FIFO, Weighted Average, Standard Cost in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cost Formulas and Techniques: FIFO, Weighted Average, Standard Cost: frequently asked questions

Why is LIFO not allowed in Ind AS 2?

LIFO assumes the latest purchases are sold first, so closing stock is carried at old costs. This can leave inventory on the balance sheet well away from recent cost. Ind AS 2 therefore permits only specific identification, FIFO and weighted average.

What is the difference between FIFO and weighted average under Ind AS 2?

FIFO assumes the oldest units are sold first, so closing stock carries the latest costs. Weighted average uses one average cost for all units available. In rising prices FIFO gives higher closing stock and higher profit.

When can standard cost be used to value inventory?

Standard cost can be used for convenience if the result approximates actual cost. Standards should reflect normal levels of materials, labour, efficiency and capacity. They must be reviewed regularly and revised in light of current conditions.

How does the retail method work?

You convert the selling price of closing stock back to cost by applying the cost-to-retail ratio. It suits retailers with many fast-changing items of similar margin. Cost of goods sold is then goods available at cost less closing stock at cost.