First-In-First-Out & Last-In-First-Out
Inventory can be valued by using a number of different methods. The most common of these methods are the FIFO, LIFO and Average Cost Method. Although these are not the only way to account for inventory we can briefly discuss the implications of how each method impacts the value of inventory with in your organization.
FIFO or First-in-First-out is most closely related to the flow of inventory through your organization. This is where the first items purchased are the first items sold or consumed during production.
LIFO or Last-in-First-out is a method that is closely tied with the current cost of a particular good as it represent what was most recently purchased and those are the items first to sell or be used.
Average Cost Method of accounting for inventory takes an average, as the name implies, of all of the costs of all of your inventory. It is calculated by dividing the total number of units you have on hand by the total cost of goods. You will arrive at an average unit cost for each unit of your inventory.
Depending on how you value your inventory or which method you use, you can arrive at different figures for the same events over a period of time. I know that may sound confusing, but take the example of FIFO accounting. Let’s say that your costs are rising as they so often do and each time you place an order it costs more for the same amount purchased as the previous order. Since FIFO accounting requires you to sell the first item purchased first your per unit cost will be lower than the last time you made a purchase. Ultimately resulting in a higher profit margin. Conversely, if you use the LIFO method your profit margin will appear to be smaller even though the only thing that we changed is the method of accounting for the inventory. The Average Cost method will come somewhere between the two figures.
Although the warehouse and accounting department serve different functions within an organization they are closely related as it is the inventory that is the key component to driving the business. To learn more about financial accounting and its impact on inventory valuation consult your local CPA for advice on how to run your operation and which method is best for you. However you slice it, Zenventory, web based inventory software for your organization will be able to handle the dynamic world of accounting and inventory management. Inventory can be valued by using a number of different methods. The most common of the these methods are the FIFO, LIFO and Average Cost Method. Although these are not the only way to account for inventory we can briefly discuss the implications of how each method impacts the value of inventory with in your organization.
To start managing your inventory the right way, contact Zenventory to schedule a one-on-one consultation and get your free quote. You can also call us at 1-800-268-6296. Discover the zen of inventory management and be the master of your inventory dojo.