Costing Methods (FIFO & Weighted Average)
Understanding how inventory costs are calculated is essential for accurate financial reporting and profitability analysis. PrismERP supports two standard costing methods for inventory valuation:
FIFO (First In, First Out)
FIFO assumes that the oldest items added to inventory are sold or issued first.
How It Works:
- Inventory items are issued in the order they were received.
- The cost of goods sold (COGS) is based on the earliest purchase prices.
- Closing stock reflects the most recent (latest) costs.
Best For:
- Businesses with perishable or time-sensitive items.
- Industries like food, chemicals, pharmaceuticals, etc.
Advantages:
- Reflects actual physical flow in many businesses.
- Helps avoid obsolete inventory.
- Results in higher profits during inflation (since older, cheaper costs are used).
Weighted Average Cost (WAC)
This method calculates an average cost per unit after every purchase.
How It Works:
- Average cost is computed by dividing total cost of inventory by total quantity available.
- Each issue or sale uses the same average cost, regardless of purchase date.
Best For:
- Businesses with homogeneous or interchangeable products.
- Retail, manufacturing, or wholesale industries.
Advantages:
- Smooths out price fluctuations.
- Easier to manage and understand.
- Consistent cost application across sales and issues.
📌 Summary Comparison
| Feature | FIFO | Weighted Average |
|---|---|---|
| Cost Used for COGS | Oldest available cost | Average of all costs |
| Closing Inventory Value | Based on latest purchases | Based on averaged cost |
| Best For | Perishable goods | Standardized, bulk products |
| Complexity | Medium | Simple |
In PrismERP, you can choose your preferred costing method during initial configuration or change it later (with admin permission). This flexibility ensures your inventory valuation aligns with your business and accounting needs.