What Is FIFO?

First In, First Out (FIFO) is a valuation strategy and asset management in which the first assets created or purchased are sold first. FIFO assumes that assets with the oldest cost are included in the COGS income statement, which saves money on taxes. 

Significance of FIFO in E-commerce Logistics 

The FIFO method ensures that stock rotation is frequently employed to control perishable items with an expiry date. 

Several other benefits of this method are:

  • Enhanced quality control – By distributing the oldest products first, FIFO ensures that customers receive consistent products. FIFO rules out any obsolete stock with proper inventory rotation.
  • Accurate stock turnover – With a systematic approach to stock rotation, FIFO aids in perfect stock turnover with well-timed replenishment.
  • Prevents stock from expiring – With the oldest stock processed first, FIFO prevents stock expiration and saves costs on quality control.

Prerequisites to Calculate FIFO and How it Works

FIFO is often used for the cost flow assumption procedure. It refers to the method of moving a company’s inventory cost to its cost of goods sold. 

The prerequisites include the following –

  • Manufacturing details of products, like date and time
  • The cost of purchased goods to resell
  • The cost of manufactured goods, including labor, material & manufacturing overhead expenses.

In FIFO accounting, older units are assumed to have been sold first in the inventory. Therefore, COGS (Cost of Goods Sold) is calculated based on these inventory costs. 

Use Case With FIFO

Assume a company XYZ produces 50 items for AUD10 each. For the next batch, XYZ will produce 50 items for AUD20 each. 

They sell 30 items first.

Using the FIFO method, the COGS for the first 30 items is AUD10 per unit.

Later on, they sell 30 more. The first 20 items will cost AUD10, and the remaining 10 will be AUD20.

 With 60 items sold, the remaining 40 units are valued at AUD20 each.

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