Why is "Recalculating the AVCO average after an issue" a common mistake in Inventory Management Methods?

Why it happens: Recalculating after every transaction. How to avoid it: Under perpetual AVCO, recalculate the average only after a PURCHASE; issues are made at the current average. Source: 9706 Examiner Reports

Why is "Confusing FIFO with LIFO (issuing the newest first)" a common mistake in Inventory Management Methods?

Why it happens: Reversing the order. How to avoid it: FIFO issues the OLDEST units first; closing inventory is the MOST RECENT prices. (LIFO is not used in 9706.) Source: 9706 Examiner Reports

Why is "Getting the profit effect of rising prices wrong" a common mistake in Inventory Management Methods?

Why it happens: Not tracing through cost of sales. How to avoid it: In RISING prices, FIFO → lower cost of sales → HIGHER profit and higher closing inventory than AVCO. Source: 9706 Examiner Reports

Why is "Ignoring the lower of cost and NRV after valuing" a common mistake in Inventory Management Methods?

Why it happens: Stopping at the method's cost. How to avoid it: The method gives the COST; then value inventory at the LOWER of cost and net realisable value (prudence). Source: 9706 Examiner Reports

Why is "Praising JIT without its risks" a common mistake in Inventory Management Methods?

Why it happens: Focusing on cost savings. How to avoid it: Note the stock-out risk, reliance on reliable suppliers and possible loss of bulk discounts. Source: 9706 Examiner Reports

Why is "Thinking the method changes total lifetime profit" a common mistake in Inventory Management Methods?

Why it happens: Seeing different yearly profits. How to avoid it: The method affects the TIMING of profit, not the total over the life of the business. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Inventory Management Methods

0% Complete

Detailed Study Notes

Detailed notes on Materials and Labour Costs for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Inventory Management Methods (FIFO, AVCO & JIT) — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

How a business values the inventory it issues and holds. Master FIFO and AVCO (both perpetual and periodic), how each affects cost of sales, profit and closing inventory, and the principles of just-in-time (JIT) inventory management.

At a glance

FIFO (first in, first out): issues are valued at the oldest purchase prices first.
AVCO (weighted average cost): issues are valued at a weighted average cost.
Perpetual: recalculate after every transaction; periodic: value at the period end.
In rising prices, FIFO gives a lower cost of sales, higher profit and higher closing inventory than AVCO.
Inventory is valued at the lower of cost and net realisable value (prudence) — the method gives the 'cost'.
Just-in-time (JIT): hold minimal inventory, ordering materials to arrive just as needed.
JIT cuts holding costs and frees cash but relies on reliable suppliers and risks stock-outs.

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

2.1.1 — Calculate the value of closing inventory using the first in first out (FIFO) and weighted average cost (AVCO) methods (perpetual and periodic).
2.1.1 — Understand the principles of just in time (JIT) management of inventory.
Link 1.5.1 — inventory is valued at the lower of cost and net realisable value.

FIFO (first in, first out)

Issue the oldest inventory first; closing inventory is the most recent purchases.

Under FIFO, the oldest units are assumed to be issued (sold) first, so the closing inventory is valued at the most recent purchase prices.

Example. Buy 100 units at $10, then 100 at $12. Issue 150 units:

The 150 issued = the first 100 at $10 ($1,000) + 50 at $12 ($600) = $1,600 cost of issues.
Closing inventory = the remaining 50 at $12 = $600 (the most recent prices).

Features:

Logical for perishable goods (oldest sold first).
Closing inventory is at up-to-date prices (recent purchases).
In rising prices, FIFO charges the older, cheaper prices to cost of sales → lower cost of sales, higher profit.

FIFO: oldest units issued first; closing inventory = most recent prices.
Logical for perishables; closing inventory at up-to-date prices.
In rising prices: lower cost of sales, higher profit, higher closing inventory.
Cost of issues uses the oldest prices first.

See the full worked example for inventory management methods →

AVCO (weighted average cost)

Issue at a weighted average cost, recalculated as new stock arrives.

Under AVCO, issues and closing inventory are valued at a weighted average cost:

$\text{Average cost per unit} = \frac{\text{Total value of inventory held}}{\text{Total units held}}$

Perpetual AVCO: recalculate the average after each purchase, then value issues at that average until the next purchase.

Example. 100 at $10 ($1,000) + 100 at $12 ($1,200) = 200 units, $2,200 → average = $11 per unit. Issue 150 → cost of issues = 150 × $11 = $1,650; closing inventory = 50 × $11 = $550.

Periodic AVCO: calculate one average for the whole period (total cost of goods available ÷ total units available) and apply it to issues and closing inventory.

Features:

Smooths out price fluctuations.
In rising prices, AVCO gives a higher cost of sales and lower profit than FIFO (the average is above the oldest prices).

AVCO: weighted average cost = total value ÷ total units.
Perpetual: recalculate after each purchase; periodic: one average for the period.
Smooths price fluctuations.
In rising prices: higher cost of sales, lower profit than FIFO.

See the full worked example for inventory management methods →

Comparing FIFO and AVCO

In rising prices, FIFO shows higher profit; AVCO smooths the figures.

The choice of method affects cost of sales, profit and closing inventory — though it does not change the physical flow of goods or the total profit over the asset's whole life (only its timing).

In a period of rising prices:

	FIFO	AVCO
Cost of sales	Lower (older, cheaper prices)	Higher (average)
Gross profit	Higher	Lower
Closing inventory	Higher (recent prices)	Lower

Consistency: under the consistency concept, a business should use the same method each period so its results are comparable; a change should be justified and disclosed.

Prudence: whichever method gives the 'cost', inventory is then shown at the lower of cost and net realisable value — so a fall in selling price can override the method.

Method affects cost of sales, profit and closing inventory (timing, not total).
Rising prices: FIFO → higher profit and closing inventory; AVCO smooths.
Apply the same method consistently (consistency concept).
Then value at the lower of cost and NRV (prudence).

See the full worked example for inventory management methods →

Just-in-time (JIT) inventory management

Hold minimal inventory; order materials to arrive just as needed.

Just-in-time (JIT) is an approach that holds as little inventory as possible — materials are ordered to arrive just as they are needed for production, and goods are made to meet actual demand.

Advantages:

Lower holding costs — less storage, insurance, security and handling.
Less cash tied up in inventory — improving liquidity.
Less risk of obsolescence, damage or theft of stock.

Disadvantages / requirements:

Relies on reliable, prompt suppliers delivering quality materials on time.
A stock-out (a late delivery or a sudden surge in demand) can halt production and lose sales.
May lose bulk-buying discounts (smaller, more frequent orders).
Needs good planning, close supplier relationships and efficient systems.

So JIT trades the savings of holding little stock against the risk of running out — it suits businesses with dependable suppliers and predictable demand.

JIT: minimal inventory; materials arrive just as needed.
Advantages: lower holding costs, less cash tied up, less obsolescence.
Risks: stock-outs halting production, lost bulk discounts.
Needs reliable suppliers, planning and predictable demand.

See the full worked example for inventory management methods →

Quick recap

FIFO: oldest units issued first; closing inventory at the most recent prices.
AVCO: weighted average cost (total value ÷ total units); perpetual or periodic.
Rising prices: FIFO → lower cost of sales, higher profit, higher closing inventory than AVCO.
Method changes the timing of profit, not the total; apply it consistently.
Inventory is then valued at the lower of cost and net realisable value (prudence).
JIT: minimal inventory; lower holding costs but risk of stock-outs.

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

FIFO: oldest in, oldest out → closing inventory at recent prices.
AVCO: average cost = total value of inventory ÷ total units; recalculate after each purchase (perpetual).
Rising prices: FIFO gives a higher profit and higher closing inventory than AVCO.
JIT: hold minimal inventory; lower holding cost but risk of stock-outs.

How it’s examined

Tested on Paper 4: Calculate the value of closing inventory / cost of issues using FIFO and AVCO (perpetual or periodic), compare the effect on profit, and explain the principles/pros and cons of JIT (2-8 marks). Examiner reports note candidates recalculating the AVCO average after issues, and mixing up FIFO with LIFO.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706 Paper 4 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-18.

Take this whole topic with you

Step-by-step worked examples — Inventory Management Methods

Step-by-step solutions to past-paper-style questions on inventory management methods, written exactly the way a tutor would explain them at the board.

Question type:

1FIFO closing inventory (5 marks)
Getting startedMulti-step problem• 9706 Paper 4 style• FIFO, AO2
Question
Purchases: 200 units at $8, then 200 units at$ 10. 250 units are issued. Using FIFO, calculate (a) the cost of issues and (b) the closing inventory value. (5 marks)
Step-by-step solution
1. Step 1
  FIFO issues the oldest first: 200 at $8 = 1,600, then 50 at $10 = 500.
2. Step 2
  (a) Cost of issues = 1,600 + 500 = $2,100.
3. Step 3
  (b) Closing inventory = remaining 150 at $10 = $1,500.
Answer
(a) Cost of issues $2,100; (b) closing inventory$ 1,500.
Examiner tip
Issue the oldest prices first; closing inventory is at the most recent prices.
2AVCO closing inventory (5 marks)
Getting startedMulti-step problem• AVCO, AO2
Question
Purchases: 200 units at $8, then 200 units at$ 10. 250 units are issued. Using perpetual AVCO, calculate (a) the cost of issues and (b) the closing inventory value. (5 marks)
Step-by-step solution
1. Step 1
  Total value = (200 × 8) + (200 × 10) = 1,600 + 2,000 = 3,600; total units = 400.
2. Step 2
  Average cost = 3,600 ÷ 400 = $9 per unit.
3. Step 3
  (a) Cost of issues = 250 × 9 = $2,250.
4. Step 4
  (b) Closing inventory = 150 × 9 = $1,350.
Answer
(a) Cost of issues $2,250; (b) closing inventory$ 1,350.
Examiner tip
Average = total value ÷ total units; apply it to issues and closing inventory.
3Compare FIFO and AVCO on profit (5 marks)
Building confidenceMulti-step problem• comparison, AO2
Question
Using the figures above (250 units sold), FIFO gives cost of issues $2,100 and AVCO$ 2,250. The 250 units sold for $15 each. Calculate the gross profit under each method and explain the difference. (5 marks)
Step-by-step solution
1. Step 1
  Revenue = 250 × 15 = 3,750.
2. Step 2
  FIFO gross profit = 3,750 − 2,100 = $1,650.
3. Step 3
  AVCO gross profit = 3,750 − 2,250 = $1,500.
4. Step 4
  FIFO gives a higher profit ($150 more) because, with rising prices, it charges the older, cheaper prices to cost of sales.
Answer
FIFO gross profit $1,650; AVCO$ 1,500. FIFO is higher because rising prices put cheaper (older) costs into cost of sales.
Examiner tip
In rising prices, FIFO → lower cost of sales → higher profit than AVCO.
4Perpetual AVCO with two issues (6 marks)
Building confidenceMulti-step problem• AVCO, AO2
Question
1 May buy 100 at $6; 5 May issue 60; 10 May buy 100 at$ 9; 15 May issue 80. Using perpetual AVCO, calculate the closing inventory value. (6 marks)
Step-by-step solution
1. Step 1
  1 May: 100 at $6 → value 600, average $6.
2. Step 2
  5 May issue 60 at $6 = 360 → 40 units left, value 240 (still $6).
3. Step 3
  10 May buy 100 at $9 (=900): total 140 units, value 240 + 900 = 1,140 → new average = 1,140 ÷ 140 = $8.142857...
4. Step 4
  15 May issue 80 at $8.142857 = 651.43 → 60 units left.
5. Step 5
  Closing inventory = 60 × $8.142857 = $488.57 (≈ $488.57).
Answer
Closing inventory ≈ $488.57 (60 units at the average$ 8.1429).
Examiner tip
Recalculate the average only after the PURCHASE (10 May), not after issues.
5Periodic AVCO (5 marks)
Building confidenceMulti-step problem• AVCO, AO2
Question
During the period: opening inventory 50 units at $10; purchases 150 at$ 12 and 100 at $14. 220 units were sold. Using periodic AVCO, calculate the closing inventory value. (5 marks)
Step-by-step solution
1. Step 1
  Total available = 50 + 150 + 100 = 300 units.
2. Step 2
  Total value = (50 × 10) + (150 × 12) + (100 × 14) = 500 + 1,800 + 1,400 = 3,700.
3. Step 3
  Periodic average = 3,700 ÷ 300 = $12.333... per unit.
4. Step 4
  Closing units = 300 − 220 = 80; closing inventory = 80 × 12.3333 = $986.67.
Answer
Closing inventory ≈ $986.67 (80 units at the period average$ 12.3333).
Examiner tip
Periodic AVCO uses ONE average for the whole period (total value ÷ total units).
6Why FIFO raises profit in inflation (4 marks)
StretchWord problem• comparison, AO3
Question
Explain why, during a period of rising prices, FIFO produces a higher profit than AVCO. (4 marks)
Step-by-step solution
1. Step 1
  FIFO issues the oldest units first — at the earlier, lower prices.
2. Step 2
  So FIFO charges a lower cost of sales to the statement of profit or loss.
3. Step 3
  A lower cost of sales means a higher gross profit.
4. Step 4
  AVCO uses an average of old and new prices, which is higher than the oldest prices, so its cost of sales is higher and profit lower.
Answer
FIFO charges the older, cheaper prices to cost of sales → lower cost of sales → higher profit; AVCO's average is higher.
Examiner tip
FIFO's cost of sales uses cheaper old prices in inflation; AVCO blends them.
7Method affects timing, not total (4 marks)
StretchWord problem• comparison, AO3
Question
Explain why the choice between FIFO and AVCO affects the timing of profit but not the total profit over the life of the business. (4 marks)
Step-by-step solution
1. Step 1
  A higher closing inventory this year (e.g. FIFO in inflation) raises this year's profit.
2. Step 2
  But that closing inventory becomes next year's opening inventory, increasing next year's cost of sales.
3. Step 3
  So the extra profit this year is offset by lower profit next year.
4. Step 4
  Over the whole life, all inventory is eventually charged to cost of sales, so total profit is the same — only its timing differs between methods.
Answer
Closing inventory becomes next year's opening inventory, so a method only shifts profit between years; total profit over the life is unchanged.
Examiner tip
The methods differ in timing of profit, not the total — a key A-Level point.
8Advantages and disadvantages of JIT (5 marks)
StretchWord problem• JIT, AO3
Question
Explain two advantages and two disadvantages of a just-in-time (JIT) inventory system. (5 marks)
Step-by-step solution
1. Step 1
  Advantage 1 — lower holding costs: less storage, insurance, security and handling, since little inventory is held.
2. Step 2
  Advantage 2 — less cash tied up: money is not locked in stock, improving liquidity; less obsolescence/damage risk.
3. Step 3
  Disadvantage 1 — stock-out risk: a late delivery or demand surge can halt production and lose sales.
4. Step 4
  Disadvantage 2 — reliance on suppliers / lost discounts: depends on prompt, reliable suppliers, and small frequent orders may lose bulk discounts.
Answer
Advantages: lower holding costs, less cash tied up. Disadvantages: stock-out risk halting production, reliance on suppliers / lost bulk discounts.
Examiner tip
Balance the holding-cost savings against the stock-out/supplier risk.
9When JIT is suitable (4 marks)
StretchWord problem• JIT, AO3
Question
Explain the conditions a business needs for a just-in-time system to work well. (4 marks)
Step-by-step solution
1. Step 1
  Reliable, prompt suppliers who deliver quality materials exactly when needed.
2. Step 2
  Predictable, stable demand, so production can be planned to match it.
3. Step 3
  Good planning and efficient systems (and close supplier relationships) to coordinate deliveries.
4. Step 4
  Without these, a stock-out could halt production — so JIT suits businesses that can rely on their supply chain.
Answer
Reliable prompt suppliers, predictable demand, and good planning/systems; otherwise a stock-out could halt production.
Examiner tip
JIT needs dependable suppliers and predictable demand to avoid stock-outs.
10Lower of cost and NRV after the method (5 marks)
StretchMulti-step problem• NRV, AO2
Question
Closing inventory under FIFO is valued at $9,000, but the goods can now only be sold for$ 7,500 (net realisable value). State the value used and the concept applied, and the effect on profit. (5 marks)
Step-by-step solution
1. Step 1
  Inventory is valued at the lower of cost and net realisable value.
2. Step 2
  Cost (FIFO) = $9,000; NRV = $7,500 → use $7,500.
3. Step 3
  This applies the prudence concept (do not overstate inventory/profit).
4. Step 4
  The write-down of $1,500 (9,000 − 7,500) reduces profit by $1,500.
Answer
Value at $7,500 (lower of cost and NRV); prudence; profit reduced by the$ 1,500 write-down.
Examiner tip
The costing method gives the 'cost'; NRV can then override it (prudence).

Model Answers — Inventory Management Methods

High-scoring sample answers for inventory management methods on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 4 style5 marks
Q (5 marks). Purchases: 300 units at $5, then 200 units at$ 7. 350 units are issued. Using FIFO, calculate the cost of issues and the closing inventory value.
Model answer
FIFO issues the oldest first: 300 at $5 = 1,500, then 50 at $7 = 350. Cost of issues = 1,500 + 350 = $1,850. Closing inventory = remaining 150 at $7 = $1,050.
Why this scores
Marking (point-based, 5). 300 at $5 (1.5); 50 at$ 7 (1.5); cost of issues $1,850 (1); closing inventory$ 1,050 (1).
Question 2
9706 Paper 4 style5 marks
Q (5 marks). Purchases: 300 units at $5, then 200 units at$ 7. 350 units are issued. Using AVCO, calculate the cost of issues and the closing inventory value.
Model answer
Total value = (300 × 5) + (200 × 7) = 1,500 + 1,400 = 2,900; total units = 500. Average = 2,900 ÷ 500 = $5.80 per unit. Cost of issues = 350 × 5.80 = $2,030. Closing inventory = 150 × 5.80 = $870.
Why this scores
Marking (point-based, 5). Total value $2,900 (1); average$ 5.80 (2); cost of issues $2,030 (1); closing inventory$ 870 (1).
Question 3
9706 Paper 4 style5 marks
Q (5 marks). Using the figures above, the 350 units were sold for $9 each. Calculate the gross profit under FIFO and AVCO, and explain why they differ.
Model answer
Revenue = 350 × 9 = 3,150. FIFO gross profit = 3,150 − 1,850 = $1,300. AVCO gross profit = 3,150 − 2,030 = $1,120.

They differ because prices rose ( $5 →$ 7). FIFO charges the older, cheaper units ( $5) to cost of sales, giving a **lower cost of sales and higher profit**, while **AVCO** uses a **blended average ($ 5.80)**, giving a higher cost of sales and lower profit. (The difference is in the timing of profit, not the total over the life of the business.)
Why this scores
Marking (point-based, 5). FIFO $1,300 (1.5); AVCO$ 1,120 (1.5); explanation — rising prices / FIFO uses cheaper old costs (2).
Question 4
9706 Paper 4 style6 marks
Q (6 marks). 1 June buy 200 at $4; 8 June issue 120; 15 June buy 200 at$ 6; 22 June issue 150. Using perpetual AVCO, calculate the closing inventory value.
Model answer
1 June: 200 at $4 → value 800, average $4.

8 June issue 120 at $4 → 80 units left, value 320.

15 June buy 200 at $6 (1,200): total 280 units, value 320 + 1,200 = 1,520 → new average = 1,520 ÷ 280 = $5.4286.

22 June issue 150 at $5.4286 → 130 units left.

Closing inventory = 130 × 5.4286 = $705.71.
Why this scores
Marking (point-based, 6). After 8 June 80 units at $4 (2); new average$ 5.4286 after 15 June purchase (2); closing 130 units = $705.71 (2). Recalculate only after the purchase.
Question 5
9706 Paper 4 style6 marks
Q (6 marks). Opening inventory 100 units at $20; purchases 300 at$ 22 and 200 at $25. 450 units were sold. (a) Calculate the closing inventory value using periodic AVCO. (b) Calculate it using FIFO. (c) State which gives the higher profit and why.
Model answer
Total available = 600 units; closing units = 600 − 450 = 150.

(a) Periodic AVCO: total value = (100 × 20) + (300 × 22) + (200 × 25) = 2,000 + 6,600 + 5,000 = 13,600; average = 13,600 ÷ 600 = $22.6667; closing inventory = 150 × 22.6667 = $3,400.

(b) FIFO: the 150 left are the most recent → 150 at $25 = $3,750.

(c) FIFO gives the higher profit: it has the higher closing inventory ( $3,750 vs$ 3,400), which means a lower cost of sales and so a higher gross profit, because prices are rising.
Why this scores
Marking (point-based, 6). AVCO $3,400 (2.5); FIFO$ 3,750 (2); FIFO higher profit (higher closing inventory / lower cost of sales) (1.5).
Question 6
9706 Paper 4 style5 marks
Q (5 marks). Explain why the choice between FIFO and AVCO does not affect the total profit of a business over its whole life, only the timing.
Model answer
The two methods value issues and closing inventory differently, so in any one year they give different cost of sales and profit. For example, in rising prices FIFO gives a higher closing inventory and so a higher profit in that year.

However, a year's closing inventory becomes the next year's opening inventory, which increases the next year's cost of sales. So the extra profit recorded in one year is reversed in the following year(s).

Over the whole life of the business, all the inventory is eventually charged to cost of sales at its actual purchase cost, so the total cost of sales — and therefore total profit — is the same under either method. Only the timing of when the profit is recognised differs, which is why the consistency concept matters for year-on-year comparison.
Why this scores
Marking (point-based, 5). Methods differ each year (~1.5); closing → opening reverses it (~2); total profit same, only timing differs (~1.5).
Question 7
9706 Paper 4 evaluation style6 marks
Q (6 marks). A manufacturer is considering moving to a just-in-time (JIT) inventory system. Discuss whether it should do so.
Model answer
Arguments for JIT.

Lower holding costs: holding minimal inventory cuts storage, insurance, security and handling costs.

Less cash tied up: money is not locked in stock, improving liquidity, and there is less risk of obsolescence, damage or theft.

Arguments against / risks.

Stock-out risk: if a delivery is late or demand surges, production could halt, losing sales and possibly customers.

Reliance on suppliers: JIT depends on prompt, reliable suppliers delivering quality materials exactly when needed.

Lost bulk discounts: ordering small quantities frequently may forfeit quantity discounts, and may raise ordering/delivery costs.

Conditions for success. JIT works well only with dependable suppliers, predictable demand, and good planning/systems.

Conclusion. The manufacturer should adopt JIT only if it has reliable suppliers and reasonably predictable demand; if so, the savings in holding costs and freed-up cash make it worthwhile. If its supply chain or demand is unreliable, the risk of stock-outs halting production would outweigh the savings, and it should keep some buffer inventory instead.
Why this scores
Marking (point-based, ~6). Advantages (holding cost / cash / obsolescence) (~2); disadvantages (stock-out / supplier reliance / lost discounts) (~2.5); conditional conclusion (~1.5).
Question 8
9706 Paper 4 style4 marks
Q (4 marks). A business values its closing inventory at $14,000 using AVCO, but the goods can now only be sold for$ 11,000. State the value to be used in the financial statements, the concept applied, and the effect on profit.
Model answer
Inventory is valued at the lower of cost and net realisable value. The AVCO cost is $14,000 but the NRV is $11,000, so inventory is shown at $11,000.

This applies the prudence concept (assets and profit must not be overstated). The write-down of $3,000 (14,000 − 11,000) increases cost of sales / reduces profit by $3,000.
Why this scores
Marking (point-based, 4). Use $11,000 lower of cost and NRV (~1.5); prudence (~1); profit reduced by$ 3,000 (~1.5).
Question 9
9706 Paper 4 style2 marks
Q (2 marks). State two advantages of a just-in-time (JIT) inventory system.
Model answer
Lower holding costs (less storage, insurance, security and handling).

Less cash tied up in inventory (improving liquidity), with less risk of obsolescence.
Why this scores
Marking (point-based, 2). 1 mark each valid advantage.
Question 10
9706 Paper 4 evaluation style6 marks
Q (6 marks). During a period of steadily rising prices, a company is deciding whether to use FIFO or AVCO to value its inventory. Discuss the factors it should consider.
Model answer
Effect on reported profit and inventory. In a period of rising prices, FIFO charges the older, cheaper costs to cost of sales, giving a lower cost of sales, higher profit and higher closing inventory than AVCO. AVCO uses a blended average, giving a higher cost of sales and lower, smoother profit. So FIFO would make the company look more profitable this period, with a higher inventory value in the statement of financial position.

Realism of the inventory value. FIFO values closing inventory at the most recent (up-to-date) prices, which may better reflect replacement cost; AVCO smooths out price fluctuations, which can be useful where prices are volatile.

Consistency. Whichever method is chosen, the consistency concept requires it to be used each period so results are comparable year to year; a change should be justified and disclosed.

Practicality. AVCO is often simpler to operate when there are many purchases at different prices; FIFO requires tracking which 'batch' of stock is issued.

Timing, not total. The choice affects only the timing of profit, not the total over the life of the business (closing inventory becomes next year's opening inventory).

Conclusion. The company should choose the method that gives the most useful and realistic information for its situation and then apply it consistently. FIFO gives a more up-to-date inventory value and higher current profit in inflation, while AVCO smooths the figures and is simpler with frequent purchases; the decision should weigh realism, simplicity and consistency, not a desire to flatter profit.
Why this scores
Marking (point-based, ~6). Effect on profit/inventory in rising prices (~2); realism of inventory value (~1.5); consistency (~1); practicality / timing-not-total (~1); supported conclusion (~0.5).

Key Formulae — Inventory Management Methods

The formulae you need to memorise for inventory management methods on the Cambridge IGCSE paper, with every variable defined in plain English and a note on when to use it.

Weighted average cost (AVCO)
$Average\ cost\ per\ unit = \frac{Total\ value\ of\ inventory\ held}{Total\ units\ held}$
$Total value$
the total cost of the units held
$Total units$
the number of units held
When to use
To value issues and closing inventory under AVCO (recalculate after each purchase for perpetual).
Example
3,600 ÷ 400 = $9 per unit.

Key Definitions and Keywords — Inventory Management Methods

Definitions to memorise and the exact keywords mark schemes credit for inventory management methods answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

FIFO (first in, first out)
Examiner keyword
An inventory valuation method assuming the oldest units are issued first, so closing inventory is valued at the most recent prices.
AVCO (weighted average cost)
Examiner keyword
An inventory valuation method valuing issues and closing inventory at a weighted average cost (total value ÷ total units).
Perpetual inventory
Examiner keyword
Recalculating inventory values after every transaction (each purchase updates the average under AVCO).
Periodic inventory
Examiner keyword
Valuing inventory at the period end using one average (or FIFO) for the whole period.
Just-in-time (JIT)
Examiner keyword
An inventory approach holding minimal stock, with materials ordered to arrive just as they are needed for production.
Net realisable value (NRV)
Examiner keyword
The estimated selling price less any costs to complete and sell; inventory is valued at the lower of cost and NRV.
Holding (carrying) cost
The cost of holding inventory — storage, insurance, security, handling and the cash tied up.

Common Mistakes and Misconceptions — Inventory Management Methods

The traps other students keep falling into on inventory management methods questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Recalculating the AVCO average after an issue
9706 Examiner Reports
Why it happens
Recalculating after every transaction.
How to avoid it
Under perpetual AVCO, recalculate the average only after a PURCHASE; issues are made at the current average.
✕Confusing FIFO with LIFO (issuing the newest first)
9706 Examiner Reports
Why it happens
Reversing the order.
How to avoid it
FIFO issues the OLDEST units first; closing inventory is the MOST RECENT prices. (LIFO is not used in 9706.)
✕Getting the profit effect of rising prices wrong
9706 Examiner Reports
Why it happens
Not tracing through cost of sales.
How to avoid it
In RISING prices, FIFO → lower cost of sales → HIGHER profit and higher closing inventory than AVCO.
✕Ignoring the lower of cost and NRV after valuing
9706 Examiner Reports
Why it happens
Stopping at the method's cost.
How to avoid it
The method gives the COST; then value inventory at the LOWER of cost and net realisable value (prudence).
✕Praising JIT without its risks
9706 Examiner Reports
Why it happens
Focusing on cost savings.
How to avoid it
Note the stock-out risk, reliance on reliable suppliers and possible loss of bulk discounts.
✕Thinking the method changes total lifetime profit
9706 Examiner Reports
Why it happens
Seeing different yearly profits.
How to avoid it
The method affects the TIMING of profit, not the total over the life of the business.

Inventory Management Methods

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1FIFO closing inventory (5 marks)

2AVCO closing inventory (5 marks)

3Compare FIFO and AVCO on profit (5 marks)

4Perpetual AVCO with two issues (6 marks)

5Periodic AVCO (5 marks)

6Why FIFO raises profit in inflation (4 marks)

7Method affects timing, not total (4 marks)

8Advantages and disadvantages of JIT (5 marks)

9When JIT is suitable (4 marks)

10Lower of cost and NRV after the method (5 marks)

Weighted average cost (AVCO)

FIFO (first in, first out)

AVCO (weighted average cost)

Perpetual inventory

Periodic inventory

Just-in-time (JIT)

Net realisable value (NRV)

Holding (carrying) cost

✕Recalculating the AVCO average after an issue

✕Confusing FIFO with LIFO (issuing the newest first)

✕Getting the profit effect of rising prices wrong

✕Ignoring the lower of cost and NRV after valuing

✕Praising JIT without its risks

✕Thinking the method changes total lifetime profit