Inventory and stock
What is FIFO in inventory? Meaning and example
Definition
FIFO: FIFO (first in, first out) assumes the stock bought or made first is sold or used first, on the shelf and when working out the cost of goods sold.
Also called: first in, first out, FIFO method, FIFO inventory valuation, FIFO meaning
Two meanings of FIFO
FIFO is used in two ways. As a picking rule, it means sending out the oldest stock first, so nothing sits at the back of the godown for a year. As a cost formula, it means that when you work out the cost of goods sold, the units sold are taken to be the oldest ones, at the prices you paid for them. Whatever is left in stock is then valued at the most recent prices.
The picking rule suits goods that do not expire, such as garments, stationery, hardware and utensils, though fashion and packaging can still date. For anything with an expiry date, pick by FEFO instead: first expired, first out.
FIFO in Indian accounting standards
For goods that are ordinarily interchangeable, AS 2 and Ind AS 2, the Indian accounting standards on inventories, assign cost by either the FIFO or the weighted average cost formula. Items that are not interchangeable, such as made-to-order pieces, are valued at their own individual cost. LIFO, last in, first out, is not one of the formulas they allow. Ind AS 2 adds that one formula should be used for all inventories of a similar nature and use. Ask your accountant which standard and formula your business follows.
FIFO or weighted average
When purchase prices are rising, FIFO gives a lower cost of goods sold and a higher closing stock value than weighted average, so profit looks higher. When prices fall, the opposite happens. Over several years the difference evens out. What matters more is using one method consistently and recording every receipt at its real cost, including freight. If you change methods, tell your accountant first, because it changes reported profit for the year of the change.
Worked example
FIFO cost of goods sold for a stationery distributor
A distributor buys 100 boxes of pens at ₹200 on 1 October and another 100 boxes at ₹220 on 15 October. On 25 October it sells 150 boxes. Under FIFO, the cost of the 150 boxes is 100 × ₹200 + 50 × ₹220 = ₹31,000, and the 50 boxes left are valued at ₹220 each, ₹11,000 in all. Under weighted average, every box costs (₹20,000 + ₹22,000) ÷ 200 = ₹210, so the boxes sold cost ₹31,500 and the 50 left are worth ₹10,500.
In managemate
managemate does not keep FIFO cost layers. Each lot keeps its own cost, a moving average of everything received into that lot, and goods sold take the cost of the lots they actually left, so two lots bought at different prices cost differently when sold. For picking, managemate goes by expiry date, and among lots with no expiry date, or the same one, it takes the lot recorded first, which works like FIFO. Stock received with neither a lot number nor an expiry date goes into one undated lot per product, whose cost is averaged. If your accountant values closing stock by FIFO, use managemate's quantities and work out that value separately.
Where this shows up in managemate
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