FIFO and LIFO are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, or components.
FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact newest physical object has been tracked and sold; this is just an inventory technique.
LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first. Since the 1970s, U.S. companies have tended to use LIFO, which reduces their income taxes in times of inflation.
FIFO versus LIFO
The difference between the cost of an inventory calculated under the FIFO and LIFO methods is called the LIFO reserve. This reserve is essentially the amount by which an entity's taxable income has been deferred by using the LIFO method. 90% of all Evosus customers are on the Average Costing Method.
The individual unit prices are an average of the total cost for the number of items you have. However, the total cost figure is derived based upon your Inventory Costing Method (FIFO). The costing method you have selected in Evosus is First In, First Out. To get the Total Cost figure for an item, we use the cost log records. To give you an individual unit cost on the Valuation Report, we have to average based on the total cost divided by the units on hand.
I ran the valuation today for the Product Line “Stoves.”
STOVE 1200 FPI
Total Cost = 3046.82
Figure is derived from 3 @765.30 and 1 @750.92
That average is not the value the item will post at when it’s sold, it will post according to your valuation method. We average the unit figure because otherwise we would have to list the item multiple times at each different cost it has been received it which would make reading the Valuation a nightmare.
If you use first in first out it means that the cost will track for each individual item regardless of when the next item was received. The Inventory valuation report does its best to give you average cost but the method you are using as FIFO shows the cost for each item differently than what the inventory valuation may show in each order.
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