What Is FIFO Costing (First-In, First-Out)?
Also known as: FIFO, First In First Out, FIFO inventory valuation
Definition
FIFO costing is an inventory valuation method that assigns the cost of the oldest receipts to units issued or sold first, leaving the most recent purchase costs in ending inventory. It tracks cost in layers by receipt.
FIFO Costing (First-In, First-Out) Explained
Under FIFO each receipt creates a cost layer with its own quantity and unit cost. When stock is issued to a job or shipped to a customer, the system consumes the oldest layer first and moves to the next layer when it is exhausted. Cost of goods sold therefore reflects older prices and ending inventory reflects the newest prices.
In a period of rising prices FIFO produces lower cost of goods sold and higher reported profit than average or LIFO methods. When prices fall the effect reverses. Inventory on the balance sheet under FIFO is closer to current replacement cost, which many auditors and lenders prefer. Both US GAAP and IFRS permit FIFO, and unlike LIFO it is accepted under IAS 2.
ERPs implement FIFO as a per-item cost method, not a global setting. SyteLine and Infor LN let you assign a costing method per item, and NetSuite offers FIFO as an item costing method alongside average, LIFO and standard. Mixing methods across items is allowed but complicates reporting, so most manufacturers pick one method per item class and document it. Changing an item's cost method mid-year usually needs a revaluation and a clear audit trail.
The practical weak point is physical flow. If a warehouse picks newest stock first (common with bins and mixed lots), FIFO cost layers drift away from what actually left the shelf. That does not break the books, since FIFO is a cost flow assumption, but it can matter for lot-controlled or expiring items where you also need true first-expired-first-out picking.
Why It Matters
- The costing method changes reported gross margin and inventory value, so it affects tax, covenants and valuations.
- Receipt-level cost layers give traceable margins on individual sales orders, useful when material prices swing.
- FIFO is accepted under IFRS, so international groups can use one policy across entities.
- Method choice drives how landed cost, price variances and revaluations are handled in the ERP.
In Practice
Example: you buy 100 units at 10, then 100 at 12, and ship 120. FIFO cost of goods sold is 100 x 10 + 20 x 12 = 1,240, and ending inventory is 80 x 12 = 960. An average cost method would put cost of goods sold near 1,320 and ending inventory near 880.
Frequently Asked Questions
What is FIFO in inventory costing?
FIFO assigns the cost of the oldest inventory receipts to goods issued or sold first. Ending inventory is valued at the most recent purchase costs.
Is FIFO the same as physical first in, first out picking?
No. FIFO costing is a cost flow assumption and does not require the oldest physical unit to be picked. Expiring or lot-controlled goods still need real first-expired-first-out picking rules.
Does FIFO give higher profit than LIFO?
When prices are rising, yes: FIFO reports lower cost of goods sold and higher profit than LIFO. When prices fall, the opposite is true.
Can I change an item from FIFO to another costing method?
Usually yes, but it needs a revaluation, finance approval and documentation. Do it at a period boundary and confirm tax and auditor requirements first.
Related Terms
Weighted Average Cost
Weighted average cost values inventory at one blended unit cost: total cost of units on hand divided by total quantity. In a perpetual system the average is recalculated after every receipt, and issues leave at the current average.
Standard Cost
Standard cost is a predetermined per-unit cost for material, labor, and overhead, set in advance and used to value inventory and transactions. Differences between standard and actual are captured as variances that isolate where cost deviated.
Actual Cost
Actual cost is the real cost incurred to produce or acquire an item, accumulated from the specific material prices paid, labor hours reported, and overhead applied, rather than from a predetermined standard.
Landed Cost
Landed cost is the total cost of bringing purchased goods into inventory, combining the supplier price with freight, insurance, customs duty, tariffs, brokerage, and handling, so inventory is valued at what the material truly cost to acquire.
Inventory Write-Down
An inventory write-down reduces the recorded value of inventory when its net realizable value falls below cost, because of obsolescence, damage or falling prices. A write-off removes the remaining value entirely.
Go Deeper
Inventory Carrying Cost Calculator
Build your true annual carrying cost from capital, storage, insurance, and obsolescence components - and see what an inventory reduction target is worth.
How to Set Up Actual Costing in SyteLine
Learn how to configure actual costing in Infor SyteLine CloudSuite Industrial. Set up weighted average costs, FIFO layers, and real-time cost tracking for inventory.
How to Configure Standard Costing in SyteLine
Step-by-step guide to configuring standard costing in Infor SyteLine CloudSuite Industrial. Set up cost types, material costs, overhead rates, and cost rollup parameters.
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