How to Calculate FIFO and LIFO

Every week we publish new insights and tips on shipping & fulfillment. Explore our Covid shipping resources to make sure your shipment arrives on time and in good condition. Register for an Easyship account today and get 30-days access to a Premier plan with access to Pre-generated Return Labels. Easyship’s free fulfillment checklist provides a proven step-by-step so you can ship at scale without the guesswork. We provide the necessary tools needed to keep you on budget for shipping and to safely deliver your product to backers around the world. Under FIFO, the value of ending inventory is the same whether you calculate on the periodic basis or the perpetual basis.

How to Calculate FIFO With Example

1. It is simple—the products or assets that were produced or acquired first are sold or used first.
2. Using FIFO accounting can help your store grow from a range of key benefits.
3. Let’s say you’ve sold 15 items, and you have 10 new items in stock and 10 older items.
4. As with FIFO, if the price to acquire the products in inventory fluctuates during the specific time period you are calculating COGS for, that has to be taken into account.
5. This means that when a business calculates its cost of goods sold for a given period, it uses the costs from the oldest inventory assets.

When prices are increasing, companies using LIFO can benefit due to tax purposes. This tax break occurs through lowering net income, subsequently lowering the total cost of taxes a business has to pay. This is because this inventory method assumes that the first items to be sold in that accounting period are the most expensive to produce. Though it’s one of the easiest and most common valuation methods, FIFO can have downsides.

How to calculate FIFO

Calculate the value of Bill’s ending inventory on 4 January and the gross profit he earned on the first four days of business using the FIFO method. Under the FIFO Method, inventory acquired by the earliest purchase made by the business is assumed to be issued first to its customers. You mantra synonym omnichannel fulfillment partner that’s an extension of your brand, from unboxings to 2-day shipping. Ecommerce merchants can now leverage ShipBob’s WMS (the same one that powers ShipBob’s global fulfillment network) to streamline in-house inventory management and fulfillment. ShipBob finally gave us the visibility and analytics we were looking for. Through the software, we get real-time insight into how much inventory to allocate to a specific warehouse, our current on-hand inventory levels, and how long each SKU is going to last by location.

It is an alternative valuation method and is only legally used by US-based businesses. Good inventory management software makes it easy to log new orders, record prices, and calculate FIFO. Accounting software offers plenty of features for organizing your inventory and costs so you can stay on top of your inventory value.

Average cost inventory

You will also have a higher ending inventory value on your balance sheet, increasing your assets. This can benefit early businesses looking to get loans and funding from investors. As the price of labor and raw materials changes, the production costs for a product can fluctuate.

Using the FIFO inventory method, this would give you your Cost of Goods Sold for those 15 units. Using FIFO accounting can help your store grow from a range of key benefits. From being straightforward to implement and required by many global markets, it can also follow your store’s already-in-place inventory flow. Upgrading to an inventory management system can further simplify this process by adding visibility, allowing you to track, control and forecast your store’s stock. To calculate COGS through the FIFO method, first you need to work out the cost of your old inventory. If the price you paid for that inventory fluctuates during that time period, this does need to be taken into account as well.

Once you have that figure, you multiply the cost by the total amount of inventory sold in that period. This is used for cost flow assumption purposes, the method in which costs are removed from a business’s inventory and reported as the cost of sold products. FIFO is an assumption because the flow of costs of an inventory doesn’t have to match the actual flow of items out of inventory. Three units costing $5 each were purchased earlier, so we need to remove them from the inventory balance first, whereas the remaining seven units are assigned the cost of $4 each. The average cost inventory valuation method uses an average cost for every inventory item when calculating COGS and ending inventory value. For instance, if a brand’s COGS is higher and profits are lower, businesses will pay less in taxes when using LIFO and are less at risk of accounting discrepancies if COGS spikes.

This means that older inventory will get shipped out before newer inventory and the prices or values of each piece of inventory represents the most accurate estimation. FIFO serves as both an accurate and easy way of calculating ending inventory value as well as a proper way to manage your inventory to save money and benefit your customers. The FIFO method is the first in, first out way of dealing with and assigning value to inventory. It is simple—the products or assets that were produced or acquired first are sold or used first. With FIFO, it is assumed that the cost of inventory that was purchased first will be recognized first. FIFO helps businesses to ensure accurate inventory records and the correct attribution of value for the cost of goods sold (COGS) in order to accurately tracking cash payments pay their fair share of income taxes.

Using specific inventory tracing, a business will note and record the value of every item in their inventory. Inventory value is then calculated by adding together the unique prices of every inventory unit. The average cost method is the simplest as it assigns the same cost to each item.

FIFO is a straightforward valuation method that’s easy for businesses and investors to understand. It’s also highly intuitive—companies generally want to move old inventory first, so FIFO ensures that inventory valuation reflects the real flow of inventory. Find the guaranteed cheapest rates for any courier in seconds with Easyship’s free shipping rate calculator. Compare discount rates from USPS, UPS, FedEx, and 550+ courier services at a glance. This method values your inventory so that the business is less likely to lose money from products that can expire or become obsolete.