Item Costs and Valuation Methods: FIFO Method

The FIFO (first in, first out) valuation method assumes that the items purchased or produced first are the first ones to be sold. As per FIFO, the inventory that a company has at the end of an accounting period consists of the most recently purchased or produced items. The primary advantage of the FIFO method is minimizing losses related to obsolete and perishable stock. International companies use the FIFO method because it is widely accepted by regulatory authorities and standards, including IFRS and GAAP.

By prioritizing the sale of the oldest stock first, FIFO determines the value of the on-hand inventory using the most recently acquired items. This ensures a more precise alignment of inventory cost with the current market value, offering a clearer understanding of inventory value and replacement costs. International companies use the FIFO method because it is widely accepted by regulatory authorities and standards, including IFRS and GAAP.

You assign the FIFO valuation method to a stock item by specifying FIFO in the Valuation Method box on the General tab of the Stock Items (IN202500) form.

Tracking of Costs for Items with the FIFO Method

If the FIFO (first in, first out) valuation method is assigned to a stock item, the item's unit cost is recorded in layers. Each cost layer is identified by the receiving document number, inventory ID, and warehouse. You can review the date, document number, inventory ID, item's quantity, and cost on the Inventory Transaction History (IN405000) or Inventory Transaction Details (IN404000) inquiry form.

When a stock item is received in a warehouse, on the release of each new document the system creates a new cost layer. You can update item cost in a particular cost layer on the Adjustments (IN303000) form by selecting the required receiving document number in the Receipt Nbr. box on the Details tab.

When a certain quantity of a stock item with the FIFO valuation method is issued, the cost for the item is assigned starting with the earliest available cost layer. If the quantity to be issued is greater than the quantity in the earliest cost layer, this quantity is issued as follows:

• The entire quantity from the earliest cost layer (with the associated unit cost)
• The rest of the required quantity from the next earliest cost layer (with another associated unit cost)

The Unit Cost box on the Issues (IN302000) form displays the unit cost for the first unit to be issued. You can open the Line Details dialog box to view particular items to be issued or to select them by a lot or serial number. The Ext. Cost value on the Issues form will be automatically calculated as the sum of the unit costs of all listed items.

Example of Cost Calculation for the FIFO Method

Suppose that a stock item was purchased in the following way:

• Cost layer 1: May 10, 5 units at $8 each
• Cost layer 2: June 10, 5 units at $10 each

The total stock cost is (5 * $8) + (5 * $10) = $90.

Then suppose that a sales order has been created with 8 items. All units from cost layer 1, and three units from cost layer 2 will be used to complete the issue transaction, with the extended cost equal to (5 * $8) + (3 * $10) = $70.