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ACCA Applied Knowledge · Management Accounting · Accounting for material, labour and overheads

During a period of rising purchase prices, which statement correctly compares the FIFO and AVCO methods of inventory valuation?

When prices rise, FIFO charges the older cheaper costs to production, giving lower cost of sales and higher profit than AVCO. The newest, more expensive purchases stay in closing inventory, so FIFO shows a higher closing inventory value.

  1. AFIFO gives a higher closing inventory value and a higher profit than AVCOCorrect
  2. BFIFO gives a lower closing inventory value and a higher profit than AVCO
  3. CFIFO gives a higher closing inventory value and a lower profit than AVCO
  4. DFIFO gives the same closing inventory value and profit as AVCO

Explanation

With rising prices FIFO issues the older, cheaper units to cost of sales, so cost of sales is lower and profit higher. The latest, dearer units remain in closing inventory, so its value is higher than under AVCO, which smooths the cost. The option claiming lower profit confuses FIFO with LIFO.

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