Understanding FIFO, LIFO, and Average Cost Methods for Inventory
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- Опубліковано 7 бер 2023
- FIFO? LIFO? Average Cost? Periodic inventory method? Perpetual inventory method? Which one do you choose for your ecommerce business and why?
All this can sound really confusing, but we break it all down to make it easy to understand. We also cover:
👉 What are the different inventory costing methods?
👉 What are the pros and cons?
👉 Which system is best for YOUR business?
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Thank you for explaining this so well.
You're welcome!
What if we lost inventory or supplier sent extra inventory? How would you record that? Would you just multiply the lost or extra inventory by cost of unit? How would we report this on tax return?
If it is lost inventory that you received and then lost then you would write the value of inventory lost to cost of goods sold, typically under an adjustment account. For extra inventory that was received that you didn't have to pay for I would reallocate the cost that you purchased the original inventory for so that those SKUs now have a value associated with them (this would drop the product cost for each SKU).
The simplicity of WAC is very appealing. However, the inconsistent use of terminology from one person to the next has me confused. Is WAC (and the resulting COGS) calculated for each product (ie. the average cost of a specific product) or is it calculated using the total cost of all products in inventory?
For example, I have 500 different types of widgets in my inventory. At the low end Widget-A costs me $1 per unit. At the top end, Widget-ZZZ costs me $20,000 per unit. If I calculate the average using the total cost of all the different widget types in inventory, then I get an average cost per unit of $2,000. Now, I sell Widget-A for $1.50, my COGS for that unit would be $2,000? Or if I sell Widget-ZZZ for $25,000, my COGS is still $2,000?
It depends on what you want to know. Are you looking for an overall COGS or do you want to know your COGS by product? If all you want is an overall number, you can average your whole inventory, but that is very inaccurate. You'd get more reliable numbers if you did it by product (Widget A, Widget B, etc.)
Im a programmer and this also came as a problem. i prefer FIFO because its just how we generally do things in business.
there is really no point in selling NEW STOCKS when you have the OLD STOCK of the same item in inventory even if they don't expire.
its just that FIFO can get VERRRYYY TRICKY in coding, as you have to backtrack a bit, find which items are older and then AVERAGE the cost STILL because they can have different costs depending on how much item you are trying to PULL OUT of your inventory (e.g. for 70pcs ... 50pcs costing 20ea + 20pcs costing 25ea).
AND SINCE you present the item on invoice in ONE LINE, you will still have to AVERAGE the cost of items you pulled out to show it in one line. so it becomes 70pcs @ 21.42ea.
Yes, inventory costing is tricky no matter which way you look at it.