Perfect Inventory Management with FIFO Method
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Fifo Method:
When it comes to inventory management, then the most useful and popular method adopted is known as the FIFO method. Mastering FIFO is not tough at all. Doing it right can lead to eminent ease and facilitation in your business. FIFO stands for First in First Out.
As the name indicates, it is the method in which the products that are older must become in front for sale. While the newest stock stays over there until the previous one is sold. FIFO method is based on the FIFO formula which is responsible for accurate calculation of inventory.
Product Deterioration:
Among different issues pertaining to the older stock is product deterioration. The oldest products are much prone to damages. For instance, in the case of pharmaceutical products such as tablets, capsules, syrup, etc., the risk of deterioration is much more. Many of the chemical reactions can occur inside it.
Consuming such medication can lead to harm to your health. Some of the times, it proves to lethal to health. Hence, it is massively important to prevent the product from deterioration and sell them on the basis of first in and first out. Another issue is price fluctuation, such as price hike of products with passage of time. It is dealt with properly with the use of the FIFO method.
Expiry Issues:
With the FIFO method, the product expiry issues are dealt with properly. In many of the businesses, there exists a problem that the previous stock stays in inventory due to negligence or poor management, and when it is sold to a customer then it is found to be expired, which damages the reputation of business too and harms the life of individuals as well. FIFO method properly deals with such issues by clearing the stock on the basis of first in and first out.
How to Calculate FIFO?
Calculating FIFO is quite necessary for ensuring that inventory is being managed properly or not and ether the stock in hand is just appropriate or not. With FIFO, the purchased and manufactured stock at first is sold first. It is often calculated when the accounting period is ended. For calculation of the FIFO method, the cost of goods sold is referred to as the older inventory.
You need to figure out the cost oldest inventory in order to determine COGS (cost of goods sold). Now, the need of the hour is to multiply COGS with the cost of sold inventory. This is how you determine the inventory by the FIFO method.