What is the Difference Between FIFO and Weighted Average?
🆚 Go to Comparative Table 🆚The main difference between FIFO (First In, First Out) and Weighted Average inventory valuation methods lies in how they calculate inventory and the cost of goods sold (COGS). Here are the key differences:
- FIFO: This method assumes that the oldest inventory units are sold first. It is commonly used because it better reflects current market prices by valuing the outstanding inventory at the cost of the most recent purchases. FIFO is the most commonly used inventory valuation method.
- Weighted Average: This method calculates the average cost of all inventory units available for sale. It is then used to determine the COGS and the value of ending inventory. The weighted average method is less commonly used compared to FIFO.
Both methods have their advantages and can be chosen based on the company's discretion. The choice between FIFO and weighted average depends on how the inventory is issued and the desired representation of the costs of goods sold. Keep in mind that weighted average costing may understate or overstate the COGS, and consequently, the business's declared profit.
Comparative Table: FIFO vs Weighted Average
Here is a table comparing the differences between the FIFO (First In, First Out) and Weighted Average inventory valuation methods:
| Feature | FIFO | Weighted Average |
|---|---|---|
| Definition | FIFO is an inventory valuation method where the first purchased goods are sold first. | Weighted Average is a method that uses the average inventory levels to calculate inventory value. |
| Usage | FIFO is the most commonly used inventory valuation method. | The usage of the weighted average method is less compared to FIFO. |
| Method | Inventory will be issued from the oldest available batch. | Inventory will be averaged out to arrive at a price. |
| Calculation | FIFO better reflects current market prices by valuing the outstanding inventory at the cost of the most recent purchases. | Weighted Average calculates the average cost of all inventory units available, which is then used to determine the cost of goods sold and the value of ending inventory. |
Both FIFO and Weighted Average are popular inventory valuation methods, and companies can decide which method to use based on their discretion. The difference between the two depends on the way the inventory is issued and how the costs are calculated.
- Average vs Weighted Average
- FIFO vs LIFO
- Aggregate vs Average
- Number Average vs Weight Average Molecular Weight
- Weighted vs Unweighted GPA
- RMS vs Average
- Instantaneous Rate vs Average Rate
- Density vs Weight
- Gravity vs Weight
- Velocity vs Average Velocity
- Gram Equivalent vs Equivalent Weight
- Mass vs Weight
- Mass vs Weight
- Average Cost vs Marginal Cost
- Gross Weight vs Net Weight
- Instantaneous vs Average Velocity
- Financial Accounting vs Cost Accounting
- Acceleration vs Average Acceleration
- Balanced vs Unbalanced