Costing Methods

Costing methods in PrismERP determine how product costs are calculated whenever stock is sold, issued, or consumed. Since the same product can be purchased at different prices at different times, the costing method defines which purchase cost is applied for calculating the Cost of Goods Sold (COGS) and the value of remaining inventory. PrismERP allows selection of the costing method for each product, giving control over how inventory valuation and profit calculations are handled.

FIFO (First In, First Out)

When FIFO is used, PrismERP always takes the oldest available stock first when a product is issued or sold. For example, if a product was purchased in two batches 10 units at $100 each and another 10 units at $120 each and 12 units are sold, the system calculates the COGS by taking 10 units at $100 from the first batch and 2 units at $120 from the second batch. The remaining 8 units continue to carry the cost of the most recent purchase. FIFO is ideal for businesses where older inventory is typically used or sold first, such as retail or perishable goods, as it ensures older costs are matched with current sales while remaining stock reflects the latest purchase prices.

LIFO (Last In, First Out)

With LIFO, PrismERP assigns the most recently purchased stock first when stock is issued or sold. Using the same example, selling 12 units results in 10 units valued at $120 from the newest batch and 2 units valued at $100 from the earlier batch. The remaining stock retains the cost of the older purchase batch. LIFO is often applied when businesses want to reflect recent purchase costs in current sales, which can be helpful in industries with frequent price fluctuations.

Weighted Average Cost

The weighted average method calculates a single average cost for all available stock. Whenever new stock is received, PrismERP automatically recalculates the average cost, which is then applied to all stock issuances until another purchase changes the average. For instance, if 10 units were purchased at $100 and another 10 at $120, the system calculates an average cost of $110 per unit. Selling 12 units results in COGS of 12 × $110, which equals $1,320, and the remaining 8 units continue to carry the same average cost. Weighted average is particularly useful when purchase prices fluctuate frequently, providing a smooth and consistent cost for inventory valuation.