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Worked example
Inventory valuation (FIFO and AVCO), worked through a wholesaler
When you buy the same item at different prices, which cost do you use when you sell it? Here FIFO and AVCO are worked step by step on the same stock, through a wholesaler.
Updated August 2026 · 7 min read
Inventory sounds like it should be simple to value, until you buy the same product at different prices and then sell some. Which cost do you match against the sale, and what is left worth? Two methods answer that question differently, FIFO and AVCO, and they give different profits. Let us work both on the same stock.
The scenario
Copperfield Supplies, a hardware wholesaler, buys and sells a single product. In March it makes two purchases and one sale:
- 1 March: buys 100 units at £10 each, costing £1,000.
- 10 March: buys 100 units at £12 each, costing £1,200.
- 20 March: sells 150 units.
That is 200 units bought for a total of £2,200, and 150 sold, leaving 50 in stock. The question is how to split that £2,200 between the cost of the 150 sold (the cost of sales) and the 50 still held (closing inventory).
Method 1: FIFO (first in, first out)
FIFO assumes the oldest stock is sold first. So the 150 units sold are made up of the 100 bought at £10 and then 50 of the units bought at £12:
Under FIFO, cost of sales is £1,600 and closing inventory is £600.
Method 2: AVCO (weighted average cost)
AVCO uses the average cost of all the units held. The average cost per unit is the total cost divided by the total units: £2,200 ÷ 200 = £11 per unit. Every unit, sold or held, is valued at £11:
Under AVCO, cost of sales is £1,650 and closing inventory is £550.
Comparing the two
Same stock, different answers. Because prices were rising, FIFO charges the older, cheaper units to cost of sales, so its cost of sales is lower and its profit and closing inventory are higher. AVCO smooths the prices together. Neither is "right"; they are different assumptions, and under IAS 2 both FIFO and AVCO are allowed, but last-in-first-out (LIFO) is not.
Where this comes up in ACCA
Inventory valuation is core to Financial Accounting (FA), and it returns under IAS 2 in Financial Reporting (FR). The principle also feeds cost of sales and gross profit, so getting it right affects the whole income statement.
The best way to lock it in is to work the movements yourself. The free ACCA FA course on Clevernest teaches inventory valuation inside a real business, with instant marking as you go.
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Frequently asked questions
What is the difference between FIFO and AVCO?
FIFO (first in, first out) assumes the oldest stock is sold first, so cost of sales uses the earliest prices. AVCO (weighted average cost) values every unit at the average cost of all units held. On the same stock they give different cost of sales, closing inventory and profit.
How do you calculate FIFO?
Match the units sold against the earliest purchases first. In our example the 150 units sold take the 100 bought at £10 and 50 of those bought at £12, giving cost of sales of £1,600 and closing inventory of £600 (the remaining 50 units at £12).
How do you calculate AVCO?
Divide the total cost of the units by the number of units to get an average cost, then value both the units sold and those held at that average. In our example £2,200 divided by 200 units is £11 each, giving cost of sales of £1,650 and closing inventory of £550.
Which gives a higher profit, FIFO or AVCO?
It depends on price movements. When prices are rising, FIFO charges the older, cheaper stock to cost of sales, so cost of sales is lower and profit is higher than under AVCO. When prices are falling, the reverse is true.
Is LIFO allowed in ACCA?
No. Under IAS 2, both FIFO and AVCO are permitted for valuing inventory, but last-in-first-out (LIFO) is not allowed. ACCA exams therefore test FIFO and AVCO.