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Image source<\/span><\/a><\/p>\n As restaurants and retail stores grapple with expiration dates, spoilage, and spiraling costs, systems designed to consume the oldest items first, or first-in, first-out (FIFO), are a foregone conclusion. But in the world of<\/span> inventory management<\/span><\/a>, there is another less intuitive option, known as last-in, first-out (LIFO), that can sometimes provide a better solution.<\/span><\/p>\n The idea of using up newer items first while leaving older products to gather dust might seem counterintuitive. As they say, <\/span>out with the old, in with the new<\/span><\/i>. This traditional viewpoint discounts the impact of inventory valuation and<\/span> cost of goods sold (COGS)<\/span><\/a> on inventory management practices. We take a closer look at LIFO and FIFO and explore their benefits and drawbacks to demystify this important topic. <\/span><\/p>\n \u201cThe only way to get ahead is to find errors in conventional wisdom.\u201d<\/span><\/i> \u2013<\/span> Larry Ellison<\/span><\/a><\/p>\n As the name implies,<\/span> first-in, first-out (FIFO)<\/span><\/a> is a system used to cycle inventory where the earliest items received or produced are always consumed first. For example, soda machines and supermarket dairy aisles are organized so that the oldest stock is automatically moved closer to customers. This method is ideal for situations where spoilage or obsolescence are a concern.<\/span><\/p>\n In most cases, older purchased or manufactured items will also have a lower value or COGS. When<\/span> inventory audits<\/span><\/a> and cycle counts are performed, remaining items are valued based on their initial cost, so an imbalance of newer products drives up the overall inventory value. This makes it advantageous to turn inventory over promptly with the FIFO method.<\/span><\/p>\n The last-in, first-out (LIFO) method of<\/span> inventory rotation<\/span><\/a> is based on selling the newest items first. In a retail setting, this means putting the newest items in front while allowing older items to go unsold. Obviously, this system only makes sense for non-perishable items and products that don\u2019t run the risk of obsolescence.<\/span><\/p>\n For accounting purposes, valuation typically drops when you retain older inventory. For example, if an auto dealership purchased 75 new cars of the same model earlier in the year, for a lower price, and 25 later in the year, for a higher price, the weighted average of all available cars on the lot would drive the overall inventory value down.\u00a0<\/span><\/p>\n Deciding between LIFO and FIFO can be a difficult decision, especially when the inventory you manage is a mixture of perishable and more stable product types. Many companies utilize both methods, depending on the situation. Advanced <\/span>inventory management software<\/span><\/a> makes it easier to navigate these complex scenarios. To find out which method will work best for you, it helps to review their benefits and drawbacks.<\/span><\/p>\n <\/p>\nWhat is FIFO?<\/span><\/h2>\n
What is LIFO?<\/span><\/h2>\n
Which method is better?<\/span><\/h2>\n
LIFO vs FIFO: Side-By-Side<\/span><\/h3>\n
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