First In First Out (FIFO) assumes the products or stock purchased first will also be the first to be sold and leave the warehouse. FIFO allows you to assign a specific value to each item which gives a more accurate view of the value of inventory. FIFO can also be used to give a better understanding of the profit margins of a business.
For example, if you bought 3 identical phone cases at the following prices (increasing manufacturer or supplier costs):
- 10 at £8 in January
- 10 at £9 in February
- 10 at £10 in March
Each time you sold an item, you would deduct it from the oldest item on the list; so the £8 item would be accounted for first even if the case which cost £10 was actually sold first.
In this example, if you sold 20 of the phone cases and had 10 left over then you would use the March price to calculate the value of the leftover inventory.
10 x £10 = £100
Your leftover stock would therefore be worth £100. If you had leftover stock that was bought at two or more different prices, then you would do separate calculations to value the stock at the price it was bought at and add it all together.
When should I use the FIFO valuation method?
FIFO is an extremely simple and therefore universal valuation method which can be used for almost any type of inventory. This makes it popular with e-commerce companies as it’s straightforward and can easily be calculated.
The FIFO valuation method is also useful for products with a shorter or time sensitive shelf life such as cosmetics or food.