Aqid ERPWhy the method changes profit
When the same item is bought at different prices, the cost of each unit sold has to be decided. Weighted average costs every unit at the average price of everything bought. First in, first out (FIFO) assumes the oldest units leave first, so the cost of sales uses the older prices and the stock left on the shelf carries the newest. When prices are rising, FIFO gives a lower cost of sales, a higher profit and a higher stock value; weighted average sits between.
A worked example
100 units bought at SAR 10, then 100 at 12, then 50 at 15; 180 sold.
| Weighted average cost: 2,950 ÷ 250 | 11.80 a unit |
|---|---|
| Weighted average: cost of sales, 180 × 11.80 | 2,124.00 |
| Weighted average: closing stock, 70 × 11.80 | 826.00 |
| FIFO: cost of sales, 100 × 10 + 80 × 12 | 1,960.00 |
| FIFO: closing stock, 20 × 12 + 50 × 15 | 990.00 |
Which method is allowed
IFRS (IAS 2), which Saudi Arabia applies through SOCPA and the other Gulf states apply directly, allows FIFO and weighted average and not LIFO. A business uses the same method for items of a similar nature, and changes it only when the change gives more reliable information. Costs are recorded without input VAT that can be recovered.