FIFO vs LIFO vs average cost, explained simply

Why the valuation method matters

When you buy the same part at different prices, you need a rule for which price a sale or production run 'uses'. That rule changes your cost of goods sold, your margin and the value of stock on your balance sheet.

FIFO: first in, first out

FIFO assumes the oldest stock is used first. If you bought 100 units at 1.00 and then 100 at 1.20, the next 100 you use are costed at 1.00.

FIFO matches how most physical stock actually moves and is accepted under IFRS, so it's a common default in Europe.

LIFO: last in, first out

LIFO assumes the newest stock is used first, so in the example above the next 100 units cost 1.20. When prices rise, LIFO shows higher costs and lower profit.

LIFO is not permitted under IFRS and is mainly used by some US companies for tax reasons. Most small makers outside the US can ignore it.

Weighted average cost

Average cost blends every purchase into one running price. After the two purchases above, each unit costs 1.10 until the next purchase changes the average.

It's simple, smooths out price swings and is easy to keep accurate in software. Stoccly can value stock on average purchase cost or on the current price you set.

Which should you pick?

If you're small and outside the US, average cost or FIFO is usually the practical choice. Pick one, apply it consistently, and check with your accountant before switching.