The basics of using the First In First Out (FIFO) inventory method is to have the good received first to inventory be the first issued to a job or order, from inventory at your business, preferably manufacturing and retail where different kinds of stock come in and out of the business establishment. In today’s world, most ERP Software Systems are designed to handle the inventory automatically with little hands-on management needed. The first in first out inventory method has several advantages and we have listed four benefits here.
- Manage your inventory and have prices up to date to the current pricing trade.
- Have a system in place that increases the efficiency of inventory management.
- Increase your profit by avoiding overstocked inventory.
- Better control of profit margins.
First In, First Out inventory method is just that, the first goods received are the first goods sold. The unit price is the purchase price of the oldest item in stock, and it varies as items are issued.The FIFO method keeps a strict eye on the entrance and exit of inventory. For the retail business, a sack of rice that enters on day one should be the first thing to be sold when a customer purchases the product. The price of the sack will be based on the original purchase price plus the gross profit of the business.
Now it gets complicated when on the second day the company buys another sack at a different rate. The cost of sack one of one is added to the cost of sack 2 and then divided by two. Thereby, changing the price of the sack by the purchase of the new sack.
When the first sack is sold, the new price will be used. Continuing the process until all the sacks purchased are sold. All are compensating for the increase or decrease of the prices. This way, the business gets to have all the profit it wants with minimal or no loss.
As for the manufacturing businesses the FIFO inventory method is best when the inventory keeps on fluctuating. Raw material, for example, can be adjusted regarding its cost so the company will be able to gauge the pricing or the total cost of producing the finished good.
FIFO is a widely used inventory method for businesses which aren’t utilizing the Just in Time (JIT) inventory method which does not use any stock system. The FIFO method is needed by the company that cannot estimate which inventory items are consumed more quickly or which product gets sold out.
Practically speaking, FIFO will help companies keep track if their inventory is low, and the prices are always in check because of the inventory method. The problem with FIFO is the maintenance of a stock room or a warehouse. It encourages the use of inventories in the business when in fact the JIT system can be used. Overall, the FIFO is one of the inventory system methods that are easy to use and preferred for manufacturing companies with a variety of stock.