Inventory Costing Methods: FIFO, LIFO, and Weighted Average

Inventory costing methods are used by businesses to determine the value of their ending inventory and the cost of goods sold $($COGS$)$ during a specific accounting period. Three common inventory costing methods are:

FIFO $($First$-$In$,$ First$-$Out$)$: Under the FIFO method, it is assumed that the first units of inventory purchased or produced are the first to be sold. As a result, the cost of goods sold is based on the cost of the oldest inventory items, while the ending inventory is valued at the cost of the most recently acquired items. FIFO typically results in a higher ending inventory value and lower COGS during periods of rising prices.

LIFO $($Last$-$In$,$ First$-$Out$)$: In contrast to FIFO, the LIFO method assumes that the most recently acquired units of inventory are the first to be sold. Therefore, the cost of goods sold is based on the cost of the newest inventory items, while the ending inventory is valued at the cost of the oldest items. LIFO often leads to a lower ending inventory value and higher COGS during periods of rising prices.

Weighted Average: The weighted average method calculates the average cost of inventory by dividing the total cost of goods available for sale by the total number of units available for sale. This average cost is then used to value both the ending inventory and the cost of goods sold. The weighted average method smooths out fluctuations in inventory costs and is often used in industries where inventory items are indistinguishable or interchangeable.

Objective Question:

Which inventory costing method typically results in a higher ending inventory value during periods of rising prices?

a$)$ FIFO

b$)$ LIFO

c$)$ Weighted Average