Final answer:
Costing inventory using FIFO method involves accounting for the oldest inventory costs first when calculating cost of goods sold. There are differences for updating inventory under periodic and perpetual systems, with periodic updating at the end of the period and perpetual updating continuously. Understanding cost relationships and evaluating cost patterns are important for financial analysis.
Step-by-step explanation:
Describe costing inventory using first-in, first-out (FIFO) involves the principle where the costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold. This means that when an item is sold, the cost associated with the oldest inventory is used in the cost of goods sold calculation. There is a different treatment when it comes to updating inventory systems: periodic and perpetual. In a periodic system, the inventory and its associated costs are updated at the end of an accounting period, while in a perpetual system, updates are made continuously as transactions occur.
It's important to understand the relationship between production and costs, recognizing that each factor of production comes with a price, and this influences the total cost, fixed cost, variable cost, marginal cost, and average cost. Calculating average profit and evaluating patterns of costs can help determine potential profit. Moreover, to understand cost dynamics in relation to inventory, one may also need to explain and use index numbers and base years to account for inflation, simplifying the total quantity spent over a year for products.