FIFO and LIFO: 2 methods of moving products in a warehouse

FIFO and LIFO: 2 methods of moving products in a warehouse

FIFO and LIFO are the most important and controversial topics in warehouse management and many people do not seem to get it. Your gross profit, taxes, obsolescence and product expiration depend on the method you choose. In this article, I will explain what they are, their differences and how to implement them successfully.

What is FIFO and LIFO

First in, First Out, and Last In, First Out refer to the methods of moving inventory within the warehouse. In a FIFO methodology, the goods that entered the inventory first are sold first. The LIFO methodology is just the opposite: the items that came into inventory last are sold first.

Why are FIFO and LIFO important?

The order in which inventory is sold has three very important implications.

For inventory Valuation. The cost of products varies over time. Something bought today will most likely cost more than a year ago. The accounting system uses different methods to calculate the cost of goods sold. If a company uses a FIRST IN FIRST OUT methodology, it means that the cost of products sold is lower than it would be today. Conversely, with a LIFO methodology, the cost that the accounting system will use is higher. There are two accounting implications in this.

  • The gross profit from the sale will be higher with a FIRST IN FIRST OUT methodology than with a LIFO.

GROSS PROFIT = SALE PRICE – COST OF GOOD SOLD

Since the cost of the goods in FIRST IN FIRST OUT is lower than the newly purchased product, the gross profit will be higher.

  • Inventory valuation will be higher under FIFO than LIFO, since the cost of inventory will be higher under FIFO than LIFO. So, the balance sheet will reflect a higher value of assets in FIFO than in LIFO.

Many companies use a LIFO policy to pay less tax.That is why many countries forbid the use of LIFO.

For inventory life. Many products are perishable and must be sold before the expiration date. A LIFO method applied to food and perishable products will result in the products expiring in the warehouse. The only acceptable methodology for this type of product is FIRST IN FIRST OUT.

For inventory obsolescence. With FIRST IN FIRST OUT you ensure that the newest products are in stock. With LIFO, you risk stocking obsolete products (especially tech products) and losing warranty.

The table below summarizes the differences between both methods.

FIFO vs LIFO

Strategies to implement FIFO successfully

Here are some suggestions if you want a successful implementation of a warehouse movement policy.

  1. Label your shelves and bins. This will provide an exact position of where the goods are located.
  2. Have a clear policy on how products are organized and stored in the warehouse. If you use FIRST IN FIRST OUT, incoming goods must be placed at the front of the shelves. The opposite will be with LIFO.
  3. Never mix products with different expiration dates in one bin.
  4. Have a warehouse management system that allows tracking and suggests the picking route.

I hope this article has been helpful to you. I will continue to post information related to warehouse management, distribution practices and trends, and the economy in general. If you are interested in this article or want to learn more about Laceup Solutions, please subscribe to stay updated on future articles.

There is a lot of relevant information on our channel. Check out this video on a related subject.

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