## Permitted Cost Formulas under AS 2
### 1. FIFO (First In, First Out)
- Assumes oldest inventory is sold first
- Closing stock = most recently purchased/produced units
- Use when: items are interchangeable, physically older stock is consumed first
### 2. Weighted Average Method (WAM)
- Compute a single average cost across all available units
- Apply the same rate to both COGS and closing stock
$$\text{Avg cost p.u.} = \frac{\text{Total cost of all available units}}{\text{Total available units}}$$
### 3. Specific Identification Method
- Used when inventory items are not interchangeable (each item is individually identifiable with its own cost)
- Examples: Jewellery (each ring/chain/bangle has unique cost), art, high-value custom goods
### 4. Standard Cost Method
- Used when actual cost cannot easily be identified
- Incorporates normal usage of materials, labour, and capacity utilisation
### 5. Retail Method
- Used by retailers when inventory is rapidly changing in price
- Inventory valued as a % of selling price
## ⚠️ LIFO is STRICTLY PROHIBITED under AS 2
| Method | When to use |
|---|---|
| FIFO | Interchangeable items, older stock used first |
| WAM | Interchangeable items, pooled |
| Specific Identification | Non-interchangeable (jewellery, art) |
> Exam tip: Always check whether the question asks for COGS (cost of units sold) or closing stock (cost of units remaining). They are complementary.