About Products And FIFO Costing

Important FIFO Terms

FIFO - First In, First Out.

FIFO Costing - A method of costing 'stock in' based on the principles that:

• stock is valued based on its buying cost at the time it was purchased from the Supplier, rather than its current buying cost; and:

• the first (i.e. oldest) 'stock in' (i.e. received into stock) will be the first to be used.

Items received into stock are classified (i.e. placed into FIFO 'buckets') based on their cost and date received.

FIFO Bucket - A conceptual system-maintained 'bucket' or 'slot' used for classifying stock in according to its age (date received) and cost. Quantum VS maintains ten FIFO buckets for each Product.

Note: A FIFO bucket does not necessarily correspond to an actual physical picking location (or 'bin'). FIFO costing may potentially be used even though actual physical stock withdrawal may be in a different order.

Why Use FIFO Costing?

When you purchase a Product from a Supplier it has a certain buying cost associated with it. Over time this buying cost can change - due to price increases, special deals and discounts for example.

When stock valuation is carried out, one method is to value the stock at today's buying cost (i.e. the cost of replacing the stock today). FIFO costing involves associating product receipts with the buying cost at the time of purchase. This has certain advantages, such as:

• it potentially provides a more accurate stock valuation; and

• it potentially gives a more accurate margin calculation: when selling the product you may want to base the margin you achieve on this sale using the FIFO cost (i.e. buying cost), rather than the current cost (i.e. replacement cost).

FIFO Costing is also useful when an Inter-Branch stock transfer occurs. When FIFO Costing is used, the stock transferred takes with it the actual cost of purchase rather than the current replacement cost, making company stock valuation more accurate.

Every time new goods are received a new FIFO entry is made on the Product record. You can see the received quantity, buying cost and value of each receipt for a Product by opening the Product record and clicking the FIFO button on the Toolbar - Sub Menu. See Viewing A Product Stock FIFO Record.

How Does FIFO Costing Work?

The following section explains how FIFO Costing works in practice.

Note: The following example uses 4 FIFO Buckets. However, note that Quantum VS maintains ten FIFO Buckets for each customer. While the example uses pounds sterling, any buying currency may potentially apply.

The following table shows the FIFO buckets for Product X on Jan 22. It shows the quantities received and the associated buying costs for the last four product receipts, which were on Jan 1 (bucket 4 - the oldest bucket), Jan 8 (bucket 3), Jan 15 (bucket 2) and Jan 22 (bucket 1: the newest bucket):

When stock is sold, it is taken from the oldest bucket first.

When more stock is received:

• the newest bucket is updated with the product receipt; and:

• the quantities of the previous final two buckets are added together, while their buying costs are averaged.

This can be seen in the next example below, showing the FIFO Buckets for Product X on Jan 29:

When stock is received on Jan 29, the FIFO buckets for Product X are updated as above. Bucket 1 is 'filled' with the newest receipt. What was Bucket 1 becomes Bucket 2, and Bucket 2 becomes Bucket 3.

The oldest bucket (Bucket 4) is updated; i.e. the former Buckets 3 and 4 are amalgamated: the quantities are added together (100 + 32 = 132), while their buying costs are averaged (32 @ £9 + 100 @ £4.50 gives an average buying cost of £5.59).

The Total Cost figure is updated to show the addition of £500 worth of stock (i.e. TOTAL = £500 + £737.88 - there is a slight discrepancy in this example due to the rounding of figures when averaging the buying costs of the final two buckets).

From this point - assuming no further receipts - the next 132 units of Product X will sell with a cost of sale of £5.59 per unit.

As stock moves - i.e. as new stock is received and stock is sold - the FIFO buckets are continually updated in this way.

FIFO Costing In Quantum VS

While the above example uses four FIFO buckets, in Quantum VS ten FIFO buckets are maintained per Product. For details on viewing a Product's FIFO record see Viewing A Product Stock FIFO Record.

When activating the FIFO functionality in Quantum VS you will first need to run the Initialise FIFO Buckets Process. This sets each Product record's FIFO buckets to default values based on the current stock balance. See Initialise FIFO Buckets Process.

NEXT: Viewing A Product Stock FIFO Record