Inventory valuation: FIFO, LIFO and weighted average explained
FIFO, LIFO and weighted average put different values on the same stock. See a side-by-side example, how each changes COGS and profit, and which a small ecommerce business uses.
Stokrio Team · · 7 min read
When you buy the same product several times at different prices, you must decide which cost applies to the units you sell and which to the units still on the shelf. That choice is your inventory valuation method. It changes reported profit and the value of stock on your balance sheet, even though nothing physical differs.
Key takeaways
- FIFO assumes the oldest cost is sold first.
- Weighted average blends all costs into one average per unit.
- LIFO assumes the newest cost is sold first; it is not allowed in many countries.
- The method must be applied consistently, and your accountant and local rules decide what you can use.
One example, three methods
You buy 100 units at $10, then 100 at $12. You sell 120.
FIFO. The first 100 sold cost $10, the next 20 cost $12. COGS = 1,000 + 240 = $1,240. The remaining 80 units are valued at $12: $960.
Weighted average. Average cost = (1,000 + 1,200) ÷ 200 = $11. COGS = 120 × 11 = $1,320. Remaining 80 × $11 = $880.
LIFO. The newest cost is sold first: 100 at $12 and 20 at $10. COGS = 1,200 + 200 = $1,400. Remaining 80 × $10 = $800.
Total cost is the same $2,200 in every case; it is split differently between COGS and stock.
What each does when prices rise
- FIFO gives the lowest COGS and highest profit.
- LIFO gives the highest COGS and lowest profit, which is why tax rules restrict it.
- Weighted average sits in between and smooths price swings.
When prices fall, the order reverses.
Which should you use?
Many small ecommerce businesses use weighted average because it is simple and stable, or FIFO because it mirrors how stock physically moves. LIFO is not permitted under IFRS and is not allowed or common in many countries, so check before considering it. Whatever you pick, apply it consistently and agree it with your accountant.
FIFO as a picking rule is different
FIFO and FEFO are also picking rules for the warehouse: ship the oldest or earliest-expiring units first. A business can value stock by weighted average while picking FIFO. Do not confuse the accounting method with the physical rule.
Where valuation shows up
- COGS and gross margin.
- Inventory turnover and GMROI, which use value at cost.
- Insurance values and lender reports.
- Write-downs for dead stock, where stock is valued at the lower of cost and what you could sell it for.
How Stokrio helps
Stokrio records receipts and costs per product and includes inventory value reports. Confirm with your accountant how valuation should be reported for your jurisdiction. See inventory reports.