Apply FIFO and moving AVCO to perpetual records
Update inventory cost records after each receipt and issue using FIFO layers or a moving weighted average after purchases.
Section 2.1 · Costs and cost behaviour
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons cover Topic 2.1.1: materials and labour costs, fixed, variable, semi-variable and stepped costs, direct and indirect cost elements, FIFO and AVCO under periodic and perpetual inventory systems, and just-in-time principles. Practice is self-checked, not an official Cambridge grade; full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use arithmetic with units and distinguish a material purchase, material issued to production, labour cost and inventory balance before classifying a production cost.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A FIFO record has 15 units at $3 and 20 units at $4. An issue of 18 units is made. Which layer is used first?
What you will learn
- Maintain FIFO layers in a perpetual inventory record
- Recalculate moving AVCO after each purchase
- Check that issues plus closing inventory reconcile to total cost available
Update FIFO layers after every transaction
A perpetual record is updated whenever inventory is received or issued. With FIFO, retain the chronological cost layers. When material is issued, remove units from the oldest remaining layer first; a later receipt adds a new layer at its purchase cost.
Show the receipt, issue and balance after each movement. A single issue can use more than one layer. Do not use the latest purchase cost merely because it is the most recent price.
Recalculate AVCO after each new purchase
Under moving weighted average, recompute average cost after a purchase as the total cost of units then held ÷ total units then held. An issue uses the current moving average but does not change that average unit cost; it reduces both inventory units and value. The next purchase creates a new average.
Keep enough decimal places during intermediate calculations and round the final amounts as requested. Check that total goods available cost equals issued cost plus closing inventory, allowing for rounding differences.
Pause and explain
A moving AVCO balance has 30 units costing $150. Ten units are issued at the current average. What is the average cost per unit immediately after the issue, before another receipt?
Worked example
Opening stock is 100 units at $4. Buy 100 at $6, issue 120, buy 100 at $8, then issue 50. Calculate the closing inventory under perpetual FIFO and moving AVCO.
Show the worked solution
- FIFO: after the first issue, 80 units at $6 remain. The next receipt adds 100 at $8; the second issue takes 50 from the $6 layer, leaving 30 at $6 and 100 at $8 = $980.
- Moving AVCO after the first purchase is $1,000 ÷ 200 = $5; the 120-unit issue costs $600, leaving 80 at $5 ($400).
- After buying 100 at $8, average = $1,200 ÷ 180 = $6.6667. The second issue costs about $333.33; closing 130 units cost about $866.67.
Answer Closing inventory: FIFO $980; moving AVCO about $866.67. The $1,800 cost available reconciles to total issues and closing stock under each method.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Opening stock is 40 units at $10. Buy 30 at $12, issue 50 units, then buy 20 at $15. Calculate the final inventory under perpetual FIFO and moving AVCO.
Give me a hint
Record the balance after each transaction; the final purchase determines the final moving average.
Compare my reasoning
- FIFO after issue: 20 units at $12 remain. After the purchase, the balance is 20 at $12 and 20 at $15, total $540.
- Moving AVCO after first purchase = $760 ÷ 70 ≈ $10.8571; after issuing 50, 20 units cost about $217.14.
- After buying 20 at $15, moving average = ($217.14 + $300) ÷ 40 ≈ $12.9285; closing value ≈ $517.14.
Closing inventory: FIFO $540; moving AVCO about $517.14. Retain full precision for the interim average to avoid small rounding differences.
Look for these in your work
- FIFO balance layers retained
- AVCO updated at purchase
- Rounding and unit balances shown
Opening stock is 80 units at $5. A perpetual record then buys 40 units at $8 and issues 90 units. Calculate closing inventory using FIFO and moving AVCO.
Give me a hint
For FIFO, the issue uses the full opening layer then 10 units from the new layer.
Compare my reasoning
- FIFO: after issue, 30 units at $8 remain, worth $240.
- Moving average after purchase = (80 × 5 + 40 × 8) ÷ 120 = $6 per unit.
- Issue cost = 90 × $6 = $540; closing inventory = 30 × $6 = $180.
Closing inventory is $240 under FIFO and $180 under moving AVCO.
Look for these in your work
- FIFO layer issue correct
- Average computed after purchase
- Closing balance reconciles
A clerk updates a moving AVCO record only at month-end although purchases and issues occur throughout the month. Explain why that may fail to apply the perpetual method requested, and how to improve the record.
Give me a hint
The method's timing matters when new prices arrive between issues.
Compare my reasoning
- A perpetual moving average changes after each purchase, so issues after a purchase use the updated average.
- A single month-end average may assign a different cost to issues made before and after that purchase.
- Timestamp receipts and issues, keep running units and values, and recompute the average after each receipt.
A month-end average may not be a moving average for each issue. Record each receipt and issue in date order and update the unit average after every purchase so each issue uses the balance's current average.
Look for these in your work
- Perpetual timing identified
- Issue-cost impact explained
- Record improvement proposed
Common mistakes
- Recomputing moving AVCO on an issue rather than after a receipt
- Issuing from the newest FIFO layer first
- Using one average for the whole period when the question asks for a moving average
What can you explain now?
When is the moving AVCO unit cost normally recalculated in a perpetual record?
Compare with the explanation
After a new purchase is added to the inventory balance
An issue reduces units and value at the current average but leaves the average unit cost unchanged.
After trying it yourself, choose your next review. This is your self-assessment.
Your review choice appears on Today. Sign in to sync it across devices.
Make it stick
State when FIFO removes a layer and when moving AVCO recalculates its unit cost.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.