Overview

FIFO is an acronym for first in, first out. It is a cost layering concept under which the first goods purchased are assumed to be the first goods sold. The concept is used to devise the valuation of ending inventory, which in turn is used to calculate the cost of goods sold.

A company that uses FIFO will find that the costs it maintains in its records for its inventory will always be the most current costs, since the last items purchased are still assumed to be in stock. Conversely, the cost of the oldest items will be charged to the cost of goods sold. In a normal inflationary environment, this means that the cost of goods sold will be relatively low in comparison to current costs, which will increase the amount of taxable; also, the inventory value reported on the balance sheet will approximately match current costs.

The FIFO concept is best shown with the following example.

Received 10 of part A on December 1 at a cost of 7.58 = $758.00 in the inventory GL and the physical/shelf inventory

Received 20 of part A on December 31 X 10.49 = $209.80 in the inventory GL and the physical/shelf inventory

An item that is sold today would use the "first" cost, or $7.58, to calculate the gross profit and margins on the work order and to credit inventory/debit COGS with this method. Once ten have been sold at the cost of 7.58, the system will then use the cost of 10.49 for the next sales.

You can tell if your warehouse is set to use FIFO by accessing Parts Items Setup in the top toolbar of the Parts inquiry module.

On the Warehouses tab, if the FIFO Inventory Cost option is selected the system will track individual cost and use that for FIFO costing.  If it is unchecked, the system will use the cost on the part record (also known as replacement cost).

Correct FIFO Function

The Correct FIFO function ensures that a valid cost is associated with every part number in inventory before reconciling inventory. This involves updating or adding missing FIFO records to match the on-hand values, thereby maintaining accurate costing.

What will happen if you run the function:

If there are differences between the On Hand and FIFO quantities, the system will create new FIFO cost layers to cover the discrepancy. These layers will use:

• The current date
• The current unit cost available for the part

This adjustment ensures that your FIFO costing records match the actual inventory on hand but does not change the On Hand Qty itself. If all quantities already match, then no changes will be made for that part.

FIFO Quantity

If the Part Number is set up in a Warehouse that is configured to use FIFO Inventory Cost, there will be a FIFO Section on the Pricing/Qty Tab of the Part Number displaying details of the Part Number quantity and FIFO Cost. You can verify if the Warehouse is set up to use FIFO Inventory Cost by accessing the Parts Item Setup and checking the Warehouses tab for the FIFO Inventory Cost option.

Entries in the FIFO section are made and updated when receiving the Part Number in on a Parts Purchase Order or when selling and returning a Part on an Open Work Order, typically during monthly inventory reconciliation. This section allows manual addition and removal of FIFO entries to ensure that the FIFO quantity matches up with the On Hand Qty of the Part.

An option is available in the Parts Item Setup to mass update all Parts in a Warehouse that have a different FIFO Detail Quantity than the On Hand Quantity of the Part, ensuring consistency.

FIFO Cost Calculation

FIFO cost is determined by the system. The correct FIFO option scans all items in inventory to identify any missing part costs. These missing records can be corrected or added to the system at the part record cost to ensure FIFO records match the on-hand values.

Manual Adjustment

Users have the option to manually update the cost on the parts record, either during receiving or through manual entry.