FIFO and FEFO: valuing and picking stock the right way

How you value your stock changes the profit you report, and how you pick it changes how much you throw away. Two methods matter for most businesses: FIFO for valuing stock, and FEFO for picking it when it can expire.

FIFO: first in, first out

FIFO assumes the stock you bought first is the stock you sell first. When you make a sale, the cost of that sale is taken from your oldest purchases, and what is left on the shelf is valued at your most recent prices.

An example

You buy 100 bags of rice at GH₵300 each, then another 100 at GH₵340 when the price goes up. You sell 120 bags.

• The first 100 sold cost GH₵300 each = GH₵30,000
• The next 20 sold cost GH₵340 each = GH₵6,800
• Cost of the 120 bags sold: GH₵36,800
• Stock left: 80 bags at GH₵340 = GH₵27,200

When prices are rising, FIFO gives a lower cost of sales than using the latest price, and stock on your balance sheet close to what it would cost to replace.

Landed costs

The cost of stock isn’t only the supplier’s price. Freight, clearing, duty and handling to get it onto your shelf are part of what it cost you. Add them to the stock they relate to, or your margins will look better than they are.

FEFO: first expired, first out

FEFO is about which physical item leaves the shelf, not about cost. When stock has an expiry date, such as medicine, food, drinks or cosmetics, you pick the batch that expires soonest, even if it arrived later.

To do this you need to know which lot (batch) each item belongs to and its expiry date. That also lets you:

• see which batches are about to expire, and discount or return them in time
• trace a faulty batch to every customer who received it
• prove to a regulator where a batch came from

Which should you use?

• Every business should value stock consistently, and FIFO is the most common choice. It is accepted under IFRS.
• Anyone selling items that expire should pick by FEFO and track lots.
• Anyone selling high-value items such as phones or appliances should also track serial numbers, so a warranty claim or return can be matched to the exact unit.

Doing it in Achabs

Achabs’s Inventory module values stock by FIFO with landed costs, and can show your stock value on any past date. Turn on lot tracking for an item and every receipt records its lot and expiry, picking suggests the earliest expiry first, the expiry report shows what is about to go off, and you can trace any lot or serial number backwards and forwards.