Applying the FIFO Method for Inventory Management

The FIFO method is one of the methods inventory management in business. In addition to FIFO, there are two other methods, namely LIFO and Avarage. However, when compared to the two methods, the FIFO method is a method that is widely applied by many businesses. Why so?

Before getting into the answers to the questions above, consider the full definition of the FIFO method below.

What is the FIFO Method?

The first thing you should know about the FIFO method is that FIFO stands for First in first out. From the abbreviation, you may already understand the purpose of this FIFO method.

FIFO is a method used in inventory management where the first goods in are the first goods out. In other words, the stock of goods that enter first will be the goods that are sold or used first.

The meaning of this method is inversely proportional to the LIFO method. LIFO stands for Last in first out where the goods entered last will be the goods sold or used first.

The application of FIFO as an inventory management method is based on the assumption that the cost of purchasing products must be adjusted to the sales results. Then, the cost of the last incoming product inventory will be a benchmark for the cost of inventory that is still remaining until the end of a period.

Advantages of the FIFO Method

After understanding the definition of the FIFO method itself, then you will go into a discussion of the advantages of the FIFO method which may be the reason why many businesses apply this method.

The advantage of the first FIFO method is that this method is very suitable for businesses with products that have an expiration date. By method first in first out, then the possibility of stockpiling expired goods is very small, which will bring you another advantage, namely minimizing the risk of loss.

Because every item that comes in first will also be sold first, this will reduce the presence of dusty or damaged items due to being stored for too long. Thus, the business will avoid losses due to selling goods that are not worth selling.

Another advantage of applying the FIFO method for inventory management is that your business does not violate the law. Why? Because by applying the FIFO method, it means that you pay tax according to the real profit generated.

The amount of tax that must be paid is indeed greater than a business that applies the LIFO method. However, always remember to stick to the rules and not put your business in jeopardy.

This is information about the inventory management method First in first out. If your business sells products with expiration dates, the FIFO method is the method that works for you. Good luck!