Value closing inventory with periodic FIFO and AVCO
Calculate closing materials inventory and issues under periodic FIFO and weighted average cost using all goods available in the period.
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
There are 40 units at $2 each and 60 units at $5 each. How many units are available?
What you will learn
- Apply FIFO to periodic inventory records
- Calculate periodic weighted average cost (AVCO)
- Reconcile closing inventory and material issues to total cost available
FIFO assumes the oldest costs are issued first
Under first in, first out (FIFO), the earliest available inventory costs are assigned to issues first. The closing inventory is therefore made up of the latest cost layers in the simplified cost-flow assumption; this describes cost allocation and does not prove the physical items moved in that order.
For a periodic calculation, wait until the end of the period, total units and cost available, then identify the units left. Apply the latest purchase layers to those closing units under FIFO; the remaining cost is the cost of issues. Keep unit quantities and unit costs together.
AVCO weights the average by quantity
Periodic weighted average unit cost = total cost of units available ÷ total units available for the period. Closing inventory = closing units × that average. Material issued = units issued × the same period average. Do not take a simple average of the quoted unit prices when the quantities differ.
For each method, inventory cost available must equal cost assigned to issues plus closing inventory, subject to any stated rounding. This reconciliation is a useful check; neither method by itself measures the current market value of stock.
Pause and explain
Under periodic FIFO, which costs normally form closing inventory in this example?
Worked example
Opening stock is 100 units at $4 each. The business buys 150 units at $5 each and issues 180 units. Find closing units and closing inventory under periodic FIFO and periodic AVCO.
Show the worked solution
- Units available = 100 + 150 = 250, so closing inventory is 250 − 180 = 70 units.
- FIFO closing inventory uses the latest 70 units at $5 = $350; cost available is $1,150, so issues cost $800.
- AVCO unit cost = $1,150 ÷ 250 = $4.60; closing inventory = 70 × $4.60 = $322; issues cost $828.
Answer Closing units 70. FIFO closing inventory $350 and issues $800; AVCO closing inventory $322 and issues $828. Each method reconciles to $1,150.
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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 inventory is 40 units at $10; purchases are 30 units at $12; 50 units are issued. Calculate closing inventory and issue cost under periodic FIFO and AVCO.
Give me a hint
There are 70 available units and 20 remain. Use the newest layer for FIFO closing stock.
Compare my reasoning
- Total cost available = 40 × 10 + 30 × 12 = $760; closing units = 70 − 50 = 20.
- FIFO closing stock is 20 × $12 = $240; issue cost = 760 − 240 = $520.
- AVCO unit cost = 760 ÷ 70 ≈ $10.8571; closing stock ≈ $217.14 and issue cost ≈ $542.86.
Closing units 20. FIFO closing stock $240 and issue cost $520; AVCO closing stock about $217.14 and issue cost about $542.86.
Look for these in your work
- Units and total cost available correct
- FIFO layer chosen correctly
- AVCO weighted by quantities
A store starts with 200 units at $3.20. It buys 100 units at $3.80. It issues 210 units. Calculate closing inventory under periodic FIFO and AVCO, to the nearest cent.
Give me a hint
Calculate the total cost of all 300 units before assigning 90 closing units.
Compare my reasoning
- Total cost = 200 × 3.20 + 100 × 3.80 = $1,020; 90 units remain.
- FIFO closing inventory = 90 × $3.80 = $342.
- AVCO unit cost = 1,020 ÷ 300 = $3.40; closing inventory = 90 × $3.40 = $306.
Closing inventory is $342 under FIFO and $306 under periodic AVCO; issue costs are $678 and $714 respectively.
Look for these in your work
- Closing quantity correct
- Latest FIFO layer used
- Periodic average calculated
A buyer says FIFO always reports a higher closing inventory value than AVCO. Explain why that is not always true and identify the information needed for a comparison.
Give me a hint
Compare the direction of purchase prices with the order in which costs are assigned.
Compare my reasoning
- When costs rise, later FIFO layers may be higher than the weighted average; when costs fall, they may be lower.
- The result depends on the actual opening and purchase quantities, dates and costs during the period.
- The cost-flow method does not establish the goods' current selling price or physical movement.
The result depends on the sequence and quantities of costs. Rising prices may make FIFO closing stock higher than AVCO; falling prices may reverse that pattern. Compare the actual cost layers and do not treat the assumed cost flow as physical movement or market value.
Look for these in your work
- Price direction considered
- Quantities and layers requested
- Cost allocation distinguished from physical flow
Common mistakes
- Using a simple average of $4 and $5 when purchase quantities differ
- Applying the oldest FIFO costs to closing inventory
- Letting rounded unit costs prevent the inventory-cost reconciliation
What can you explain now?
For periodic AVCO, how is the average unit cost calculated?
Compare with the explanation
Total cost of goods available divided by total units available
The average is weighted by the number of units at each cost.
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Make it stick
Write the periodic AVCO formula and state which layer FIFO assigns to closing inventory first.
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.