Cost formulas: FIFO and weighted average

Choosing between FIFO and weighted average changes reported margins and inventory values, especially when prices move. This guide works one retailer's purchases through both cost formulas, shows how LIFO would compare under US GAAP, and explains how to choose and when a change is allowed.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

FIFO vs weighted average are the two cost formulas IAS 2 allows for interchangeable inventory. FIFO assumes the oldest units are sold first, so closing inventory reflects the most recent costs; weighted average cost spreads the total cost of units available evenly across all of them. When prices are rising, FIFO gives lower cost of sales and higher profit. In this guide's example, FIFO gives a gross profit of 4,000 and weighted average 3,793 on the same sales.

At a glance

FIFO
Oldest units sold first
Weighted average
Average cost of units available
Rising prices
FIFO gives higher profit
LIFO
Not allowed under IFRS
Consistency
Same formula for similar inventories
Excel
Inventory costing comparison
Cost formulas: FIFO and weighted averageFIFO: Oldest units sold first; Weighted average: Average cost of units available; Rising prices: FIFO gives higher profit; LIFO: Not allowed under IFRS; Consistency: Same formula for similar inventories; Excel: Inventory costing comparison.KEY FACTS AT A GLANCECost formulas: FIFO and weighted averageFIFOOldest units sold firstWeighted averageAverage cost of unitsavailableRising pricesFIFO gives higher profitLIFONot allowed under IFRSConsistencySame formula for similarinventoriesExcelInventory costingcomparisonChecked against official sourcesTax BakersCost formulas: FIFO and weighted averageFIFO: Oldest units sold first; Weighted average: Average cost of units available; Rising prices: FIFO gives higher profit; LIFO: Not allowed under IFRS; Consistency: Same formula for similar inventories; Excel: Inventory costing comparison.KEY FACTS AT A GLANCECost formulas: FIFO and weightedaverageFIFOOldest units sold firstWeighted averageAverage cost of units availableRising pricesFIFO gives higher profitLIFONot allowed under IFRSConsistencySame formula for similar inventoriesExcelInventory costing comparisonChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

A FIFO vs weighted average example

A retailer's inventory movements for the year, in date order:

LotUnitsUnit costCost
Opening inventory10010.001,000
Purchase 120011.002,200
Purchase 230012.003,600
Purchase 310013.001,300
Available for sale7008,100

It sells 450 units at 20 each, revenue of 9,000, leaving 250 units.

Same purchases, three cost formulasSame purchases, three cost formulasFIFOWeighted averageLIFO (US only)Cost of sales5,0005,2075,450Gross profit4,0003,7933,550Closinginventory3,1002,8932,650
With rising prices, FIFO gives the highest profit and inventory value; LIFO the lowest.

How does FIFO work?

The 450 units sold are taken from the oldest lots: 100 at 10, 200 at 11 and 150 at 12, a cost of sales of 5,000. The 250 units left are the newest: 150 at 12 and 100 at 13, so closing inventory is 3,100. FIFO keeps inventory close to current replacement cost on the balance sheet.

How does weighted average cost work?

The average cost of all units available is 8,100 / 700 = 11.5714. Cost of sales is 450 x 11.5714 = 5,207.14, and closing inventory 2,892.86. Under a perpetual system the average is recalculated after each purchase, which can give slightly different figures; the method shown is the periodic average.

How would LIFO compare?

LIFO, allowed only under US GAAP, takes the newest units first: 100 at 13, 300 at 12 and 50 at 11, a cost of sales of 5,450 and closing inventory of 2,650. With rising prices it gives the lowest profit and the most out-of-date inventory value, which is why IFRS removed it. See IAS 2 vs ASC 330.

What happens when prices fall?

The effect reverses. With falling purchase prices, FIFO charges the older, dearer units to cost of sales, so it reports lower profit than weighted average, and closing inventory at the newer, cheaper costs. Falling prices also make net realisable value write-downs more likely, whichever formula is used.

Periodic or perpetual weighted average?

The periodic method shown calculates one average for the whole period. A perpetual system recalculates the average after every purchase and charges each sale at the average at that moment. If the retailer here sold 200 units before buying the third lot, those units would be costed at the average of the first two lots, 10.67, not the period average of 11.57, so the results differ slightly. Most modern inventory systems use the perpetual method; both are acceptable if applied consistently.

How do you choose between FIFO and weighted average?

  • FIFO suits perishable or dated goods, where the oldest stock really is sold first, and businesses that want inventory at recent costs.
  • Weighted average suits goods that are mixed together, such as fuel, grain or chemicals in tanks, and smooths out price volatility.
  • Both are acceptable; the choice should reflect the business and must be applied consistently to inventories of a similar nature and use, year after year.

Can a company change cost formula?

Only if the change results in reliable and more relevant information. It is a change in accounting policy under IAS 8, applied retrospectively with comparatives restated, not a change in estimate.

Can you compare them in Excel?

Yes. The Inventory costing comparison (Excel) takes up to ten lots and the units sold, and shows cost of sales, closing inventory and gross profit under FIFO, weighted average and LIFO side by side, with a net realisable value test. See also IAS 2 explained.

Need help applying the standards?

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Questions people ask

What is the difference between FIFO and weighted average?

FIFO assumes the oldest units are sold first; weighted average assigns the average cost of all units available to both cost of sales and closing inventory.

Which gives higher profit, FIFO or weighted average?

When prices are rising, FIFO gives lower cost of sales and higher profit.

Can a company use both FIFO and weighted average?

Yes, for inventories of a different nature or use, but the same formula must be used for inventories of a similar nature and use.

Is changing from weighted average to FIFO a change in estimate?

No. It is a change in accounting policy, applied retrospectively.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 2 Inventories

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 2IAS 2 inventories explainedIAS 2Net realisable value and inventory write-downsIFRS vs US GAAPIAS 2 vs ASC 330: inventory, LIFO and write-downs

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This guide is general information. It is not tax or legal advice for your situation.