FIFO (First In, First Out) is a common inventory costing method used to value materials in stock. It is used in Manu Online as described below.
The FIFO method assumes that the oldest inventory (first purchased) is used or sold first, while the most recently acquired stock remains in inventory.
How FIFO Works in Inventory Management
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Stock Purchases Over Time
- Suppose you buy 100 units of Material X at $10 each on January 1st.
- Later, you buy 50 more units at $12 each on February 1st.
- Your total inventory now consists of 150 units but at two different costs.
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Selling or Using Materials in Manufacturing
- If you sell or consume 80 units, FIFO dictates that these will come from the oldest batch first (January 1st at $10 each).
- The remaining 20 units will still be at $10 each, and the 50 newer units remain at $12 each.
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Impact on Inventory Valuation
- The cost of goods sold (COGS) is based on the cost of the oldest inventory.
- The inventory value on the balance sheet reflects the cost of the most recent purchases.
Example Calculation
Scenario: Purchasing Inventory
Date | Purchase Quantity | Cost per Unit | Total Cost |
---|---|---|---|
Jan 1 | 100 units | $10 | $1,000 |
Feb 1 | 50 units | $12 | $600 |
Total | 150 units | - | $1,600 |
Scenario: Selling 80 Units
- FIFO dictates that the first 80 units sold will come from the January batch ($10 each).
- COGS Calculation:
- 80 × $10 = $800
- Remaining Inventory:
- 20 units at $10 = $200
- 50 units at $12 = $600
- Total Inventory Value Left: $800
Benefits of FIFO Costing
- Accurate Costing – FIFO aligns with physical inventory flow (oldest stock is used first).
- Higher Profit in Inflationary Periods – Since older stock is cheaper, profits may appear higher when prices rise.
- Clear Inventory Valuation – Remaining stock reflects recent purchase costs.
- Widely accepted by taxation authorities
FIFO in Manu Online
- Manu Online automatically applies FIFO costing for materials in stock.
- Every incoming purchase receipt is recorded with costs according to Landed cost, which comes from the purchase order and adjusted where necessary by the latest currency rates.
- For work orders, products are added to stock at a cost determined by the sum of items (materials and other types of items such as work time) divided by the number of units completed.
- When materials are used or sold, FIFO determines the cost deducted from inventory.
FIFO when part completing work orders
It not recommended to take part of the products from a work order before completing the work order. The reason is it is logically impossible to calculate the correct per unit cost for the products being taken to inventory. It is not know how much of the issued materials belong to these particular items and how much belongs to products that are still to be made.
For this reason, Manu Online places part completed work order products to inventory at the average cost of the product, and then later when the work order is closed, the system updates the costs of the previously items.
FIFO can not be calculated for zero stock
It is logically impossible to calculate the FIFO value of items when there is no stock quantity. This is because FIFO is calculated by adding the values of all the issued items and dividing by the quantity. If the quantity is zero this is an error. Only last cost or long term average cost can be calculated.
FIFO inventory costs when exported to Xero
Manu Online supports exporting inventory cost in Xero. Because Manu Online inventory includes all costs of an item, and not just materials, the value of other costs is stripped out before exporting. For this reason the value of inventory shown in Manu Online is different from that in Xero, but is made up by writing the additional accounts. Read the article on Xero export for more information.
Adding or removing materials will change the FIFO value of inventory
Note that unit cost will change when:
- Stock quantity is edited manually in the Warehouse section
- Stock quantity is updated using an inventory spreadsheet transfer.
Increasing the stock quantity manually. (When increasing the stock quantity manually, enter the unit cost directly in the ‘Unit Cost’ field. This cost will be included in the calculated unit cost after the changes are saved. In the spreadsheet ‘Import Inventory’, unit costs can be defined for each stock location.)
Resetting FIFO value when changing stock quantities
When inventory values are manually increased either on the screen or with a spreadsheet update, it is necessary to specify the value of the additional items. This will affect the FIFO average if any of the previous inventory had different values.
There is an option on the screen to "Reset FIFO". In practice this zeros out the stock and sets a new full stock quantity where all items have the same value as specified. Use this if you want to overwrite the history of FIFO transactions for a certain item, for instance if you are changing the unit of measure of an item.
Sales orders get unexpected margin calculations
The margin of a sales order is calculated from the difference between the net sales price and the FIFO value of the items shipped to the customer. As pointed out above, the value of the oldest items is taken first. A certain sales order might have the cost of shipped items suddenly radically different from the FIFO stock value shown on the item card. For instance, a small quantity of very low cost items has passed its way through inventory and been delivered against this particular sales order giving an unexpected high sales margin.
Scope of FIFO values
The FIFO calculation is across all inventory locations inside a company, as the financial valuation of inventory is part of a company's accounts. So making an inventory transfer between locations will not change the FIFO calculation.
However if you require to keep inventory at a certain location outside of your accounts, then it is possible to use inventory reporting to take the values by location and manually enter that data to accounts.
Writing off inventory
To remove scrap inventory it is recommended to use Service work orders. This will allow control of where items have been used.