For purposes of comparison, let us determine the amount of cost of goods sold (COGS) using the FIFO method and compare it against the COGS using average costs.
Jan 18, 2011 Sale of 200 bbl
FIFO Cost of Goods Sold = (100 bbl x $80) + (100 x $90) / 200 = $8,000 + $9,000 = $17,000
FIFO Cost of Goods Sold = $17,000 while Cost of Inventory as of Jan. 18 = $9,000
Average Cost = Cost of Goods Sold = $17,334 while Cost of Inventory as of Jan. 18 = $8,667
In studying this comparison, it appears that the use of the average cost method generates a higher amount of cost of goods sold, since part of the costs imputed is the differential cost between the purchase prices at $90 / barrel versus the $80/ barrel.
Technically, this is a near accurate computation of the actual costs, inasmuch as the petroleum purchased on Jan. 11,12, and 15 had already co-mingled, and it could no longer be distinguished which of the purchases came in ahead.
Image Credit: Fuel Barrels - Wikimedia Commons