FIFO Inventory Calculator
Is inventory management with the FIFO method right for your company?
First In First Out is the most logical movement of goods from any storage area to the point of use. Especially, for perishables and sensitive items. That’s why many companies calculate the current value of inventory using the FIFO method.
Doing the math might be difficult at first, like every other financial matter. However, we’ll walk you through the steps, and before you know it, the formulas will look quite easy.
Additionally, CalcoPolis is here with all of its finance tools. You can use the FIFO inventory calculator, plus all the other saving, investing, business, math, and macroeconomics calculators.
What Is FIFO?
First In First Out, or FIFO, is a sensible method for using stored items.
Using the products that were placed in the inventory first means keeping the items in a restaurant fresh, the electronic gadgets safe from humidity, and the latest fashion trends hot.
It also reflects nicely on a balance sheet, where the valuation of the inventory is maximized, the profits are high, and the cash conversion cycle (CCC) is quick.
How to Calculate Inventory Value Using FIFO?
In simple terms, you just multiply the cost of an item by its quantity to get the inventory value. If you have various costs for different batches on site, then you should multiply each quantity by its cost price, then add up for all the batches.
This reads easier as a formula:
Beginning Inventory = P1Q1 + P2Q2 + … PiQi
Let’s take this a step further, and reach a more generalized formula:
Current Inventory = Beginning Inventory + New Items - COGS
Which takes us to another important term: the Cost of Goods Sold, or COGS. Here’s how you can calculate its value if you implement the FIFO method.
How to Calculate the Cost of Goods Sold Using FIFO Method?
Generally, the oldest items in the inventory come at the lowest prices. For example, if you have a T-shirt printing business, and you do the following purchases:
100 T-shirts at $10
50 T-shirts at $20
200 T-shirts at $40
If you need to sell 250 T-shirts, then your COGS would be as follows:
COGS = 100 x 10 + 50 x 20 + 100 x 40 = $6000
This is done according to the formula:
COGS = P1Q1 + P2Q2 + … PnQn
Where ‘n’ is the number of inventory batches used to fulfill the sale.
While FIFO is a wonderful method for assessing the value of your inventory, it’s not the only one you can use.
There are two other recognized alternatives, which are:
- Dollar-cost averaging
LIFO is the exact opposite of FIFO. Meaning, you move the latest items that arrived into your inventory first. Last In First Out, or LIFO is particularly useful if you want to decrease the amount of taxed income.
It has a couple of downsides though, which are a reduced valuation for the inventory, and decreased profits.
This would be clear from the values of COGS as well as ending inventory. It’s worth noting that LIFO doesn’t really reflect the actual movement of goods, which is often selling the oldest first.
Additionally, LIFO isn’t accepted by the IFRS. This puts some limitations on the use of LIFO worldwide. So far, it’s allowed by the Generally Accepted Accounting Principles (GAAP) inside the US, and also for US companies operating overseas.
Dollar-Cost averaging is the simplest method of calculating inventory value. This method uses the average cost for all the products in storage. Here, all the costs are added, and then, divided by the number of items, which gives a nice estimate of inventory value.
The intelligent financial tools from CalcoPolis would let you calculate all these inventory valuation alternatives in a jiffy. And then, you can pick the right one for your business.
Advantages of the FIFO method
The main reason for adopting FIFO is that this method accurately models the actual movement and value of goods.
This is particularly important if the inventory consists of sensitive components or electronics that could be damaged if left too long in storage. Perishables, like food substances, are also handled using the FIFO method.
To a lesser extent, the fashion industry benefits from implementing FIFO in its inventories. Items left too long in storage might go out of fashion, or fail to catch up with the hottest trends.
Another great feature that comes with using FIFO is the high valuation of the inventory, especially during inflationary times. When the opposite happens, in a deflation, FIFO keeps the profits in check, and hence, the total income isn’t brutally taxed.
Moreover, it’s an internationally recognized bookkeeping method, which makes doing business with other companies overseas pretty seamless.
Created by Lucas Krysiak on 2023-02-17 14:12:47 | Last review by Mike Kozminsky on 2023-02-17 14:51:24