Using the FIFO method, the cost of goods sold (COGS) of the oldest inventory is used to determine the value of ending inventory, despite any recent changes in costs.
Under the moving average method, COGS and ending inventory value are calculated using the average inventory value per unit, taking all unit amounts and their prices into account.
For example, say a business bought 100 units of inventory for $5 apiece, and later on bought 70 more units at $12 apiece. The business sold 150 units to customers.
Using FIFO, the COGS would be $1,100 ($5 per unit for the original 100 units, plus 50 additional units bought for $12) and ending inventory value would be $240 (20 units x $24).
Under the moving average method, the average inventory value per unit as of the merchant’s most recent inventory purchase would be ([100 x $5] + [70 x $12]) / 170 = $7.80. Using that average, COGS would be $1,170 (150 units x $7.80), and ending inventory value would be $156 (20 units x $7.80).