FIFO Valuation Method

For any company it is quite important to know with the greatest precision its Inventory, since, by keeping control over it, you can give a timely response to your customers.

Having control over the inventory allows to maintain continuity in the fundamental operating processes, for this reason This is why taking care of this activity is a fundamental task to have an efficient production and provide a good service.

There are methods that allow us to value our inventories, each company chooses through which means to register and control theirs, one of these is FIFO method.

What is the FIFO Valuation method?

This is an accounting method, which allows the company to know the value of its inventories. These acronyms refer to words in English that when translated mean that the first thing that entered the warehouse, it will be the first thing that will come out, thus addressing the need to avoid having items that are going to deteriorate or expire.

Usefulness of this method for inventory control

This method, unlike others that exist to work in this aspect, is very useful, since it allows to incorporate into production those items that were acquired first.

With this simple principle, the movement or rotation of the items is maintained in the inventories, considering the dates in that these may decrease their value due to losing their validity, which causes the stock to be renewed in response to this criterion.

In economies where there is inflation, this criterion helps to sell or use first those products that were manufactured at a lower cost.

Well, with this method, each item is valued according to the price on the date it entered the warehouse inventory. The organization will leave the cheapest item, in a situation of rising prices or inflation, and will keep whatever is of the highest value.

In summary, the company will sell the lowest-cost items at market price, since they were acquired on earlier dates, thus generating business profits.

The FIFO method, as an aid in reducing inventory obsolescence

In the control of inventories where there are articles or merchandise that have an expiration date, the method FIFO is a very useful accounting tool to avoid economic losses due to deterioration of these products.

This type of article must be used before reaching this date. With the FIFO method, this situation is prevented, since it will allow the use of all those products that have more time in stock, before using the newer one.

This method allows us to know the age of our InventoryIt also helps to know those products that have less turnover or that even have no outlet.

It is very useful to reduce the losses that can be generated by a long time spent in the warehouse, for example, the damage that occurs in the packaging of our products after much weather.

This method allows you to have control over those products that have a closer expiration date.

How to put this method into practice?

To use this control method, we need:

• Know stock of products and keep it updated.
• Have the historical report of purchase requests and the dates on which the deliveries were made.

By having this information, the calculation of:

• Value of inventoried products.
• Difference between the price for the sale of a product and the cost of its production in relation to the price at which it was purchased.
• Age of our inventory.

Some situations can affect the result of this methodology, they are:

• By not knowing the history of purchases or stored products.
• Not having the sales record.
• Not having the stock-out record.

How can this method be applied?

The principle that governs the application of this method for inventory control is very simple, since it is based on first leaving the merchandise that first entered the warehouse.

Example:

If we add products of the same type to our inventory on January 23, February 1 and February 10, We must first sell the items purchased on January 23, then those of February 1 and finally those of the 10th of same month.

In this way, the most recently acquired units will remain in our inventory.

Advantages of the method

• The merchandise or products relationship is established with respect to the value of the final acquisition.
• The price of the list of products sold is estimated based on the price of the acquisition made initially, this favorably influences the balance sheets.
• This lower cost is represented as higher profit.

Disadvantages of the method

• Higher profits influence the payment to be made through taxes, which will also be higher.
• In an economy where there are inflationary processes, this method can present an extreme utility to the company, as it faces the old acquisition costs against the amounts established for the updated sale of the product.
• If the cost of inventory is assumed to have grown, the income and taxes attributed to it are also higher, since the cost of inventory is initially lower.

Contrary to FIFO method, LIFO method

The method LIFO, is a method that uses the opposite principle to the FIFO method, since it raises the output to those units that were acquired lately, so that the items that were purchased will remain in the inventory initially.

The method in question is useful in scenarios where there are permanent increases in costs, a common scenario in countries with inflation.

The use of FIFO method, It is useful when there are several groups of the same item in our company or warehouse and can also be used if these are components or products used as material for the production of other goods.

With this method, as the items that are included in inventory have different purchase prices, it requires that rules be established to define the value of those products that will remain.

The price of the oldest merchandise being lower, since it normally increases over time, if we sell first the oldest product the price of these no longer makes an average in the value of the inventory of what we keep in stock.

This is part of the management that must be carried out in each establishment to guarantee that customers are offered quality merchandise and always fresh if they are perishable.