Valuing Inventory through FIFO, LIFO, Weighted Averages, Average and Standard


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FIFO, LIFO, Average, Weighted Average and Standard Inventory Valuation Features

Overview

There are five basic approaches to valuing inventory that are allowed by SIMMS Inventory Software:

Standard

Under the Standard Costing method approach, both inventory and the cost of goods sold are based on the standard fixed cost assigned to the items within the Item Manager at the time of reporting.

First-in, First-out (FIFO)

Under FIFO, the cost of goods sold is based upon the cost of material bought earliest in the period, while the cost of inventory is based upon the cost of material bought later in the year. This results in inventory being valued close to current replacement cost. During periods of inflation, the use of FIFO will result in the lowest estimate of cost of goods sold among the three approaches, and the highest net income.

Last-in, First-out (LIFO)

Under LIFO, the cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs. The inventory, however, is valued on the basis of the cost of materials bought earlier in the year. During periods of inflation, the use of LIFO will result in the highest estimate of cost of goods sold among the three approaches, and the lowest net income.

Weighted Average

Under the Weighted Average method, both inventory and the cost of goods sold are based upon the average cost of all units currently in stock at the time of reporting. When inventory turns over rapidly this approach will more closely resemble FIFO than LIFO.

Average

Under the Average method, both inventory and the cost of goods sold are based upon the average cost of all units received in stock.

Firms often adopt the LIFO approach for the tax benefits during periods of high inflation, and studies indicate that firms with the following characteristics are more likely to adopt LIFO, wherein rising prices for raw materials and labor, more variable inventory growth, an absence of other tax loss carry forwards, and large size all have effects. When firms switch from FIFO to LIFO in valuing inventory, there is likely to be a drop in net income and a concurrent increase in cash flows (because of the tax savings). The reverse will apply when firms switch from LIFO to FIFO.

Easily select the Inventory Valuation/Sale Price Method you wish to use, the options available are Standard, FIFO, LIFO, Average and Weighted Average Costing.

From the Item Manager in SIMMS Inventory Software you can quickly view selected items, Cost and Price Average, FIFO and LIFO thus far in addition to the last Cost and Price.

Using the powerful Inventory Valuation Report Generator in SIMMS Inventory software, you select the valuation options you wish to take advantage of within the report. Some of the available options are:

Print the Current Stock Valuation
Print the Historical Stock Valuation by the end of a selectable month and year
Print the RMA Stock Valuation (based on item repair costs)
Print based on the Standard Valuation Method
Print based on the FIFO Valuation Method
Print based on the Average Valuation Method
Print based on the Weighted Average Valuation Method
Group by location code or category
Sort by location code or category

If tracking your true inventory valuation is important to you then SIMMS is the correct solution. So what are you waiting for? Contact us by phone at 604-504-4215 or by e-mail at sales@kcsi.ca so we can help you take the first steps towards the solution you have been seeking.

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