Question

FIFO tends to increase cost of goods sold when:

a) costs are constant
b) FIFO will always yield the lowest possible cost of goods sold
c) costs are declining
d) costs are increasing

Answer 1

FIFO tends to increase cost of goods sold when costs are increasing because the older, less expensive inventory is sold first, leaving the newer, more expensive items in stock.

Step-by-step explanation:

The student has asked when FIFO (First-In, First-Out) tends to increase the cost of goods sold. FIFO is an inventory valuation method where the costs of the earliest inventory items are the first to be recorded in cost of goods sold. When costs are increasing, FIFO will generally result in a higher cost of goods sold because the older, cheaper items are being sold first, while the newer, more expensive items remain in inventory. Conversely, when costs are constant or decreasing, the impact on cost of goods sold under FIFO would be different.

Supply increases due to new technology or economies of scale, leading to a declining equilibrium price, FIFO could result in a lower cost of goods sold as cheaper products are added to inventory.