Comparing Inventory Costing Methods

Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License.

The choice of inventory costing method affects the balances of

1. ending inventory,
2. cost of goods sold, and
3. gross and net profit.

During periods of rising prices, the FIFO method generally produces a larger ending inventory, a smaller cost of goods sold and a higher profit. During periods of rising prices, the LIFO method produces a smaller ending inventory, a larger cost of goods sold and a smaller profit. During periods of declining prices the effects of the two methods are reversed. The average cost method produces results that are in between the LIFO and FIFO methods.