This isn’t the first time I’ve talked about FIFO, LIFO, etc. on the Fishbowl Blog. But these are extremely important concepts that deserve to be addressed again because they are so essential when it comes to evaluating your inventory.
Without further ado, here are the five main ways to evaluate your inventory:
FIFO – First In, First Out or FIFO takes the oldest unit of a product that you have in your inventory and applies its cost to every other unit of that product in stock. It doesn’t matter if newer ones weren’t purchased at the price.
LIFO – Last In, First Out or LIFO is, of course, the opposite of FIFO. It takes the newest copy of a product that you have received into your inventory, and it uses it as a reference point for every other unit of that product. Again, it doesn’t take into account if older units were purchased at different prices.
Average Cost – The Average Cost takes the mean cost of every unit of a product that you have in your inventory. This helps to account for the changes in price that occur over time between the oldest and newest products you have in stock.
Standard Cost – The Standard Cost of a product is calculated by adding up all of the costs on the product’s bill of materials, including all of the parts, raw goods, and labor that go into it.
Actual Cost – Last but not least is the Actual Cost. This cost is determined by adding up all of the costs on a product’s work order and comparing them to the final costs incurred from actually doing the work and completing the product. Basically, if you find that the real-world cost doesn’t match the one you had on paper, you go with the former rather than the latter as the actual cost of that product.
Robert Lockard is a copywriter with Fishbowl. He writes for several blogs about inventory management, manufacturing, QuickBooks, and small business. Fishbowl is the #1-requested manufacturing and warehouse management software for QuickBooks users. Robert enjoys running, reading, writing, spending time with his wife and children, and watching movies.