Just as it is important to carry out the SWOT analysis in a company, so is the use of a good method in the inventories although this is usually a complex task. For this reason, we invite you to read this article with which you will learn what is the best way to follow the inventory with FIFO or LIFO method?
What is the Best Way to Track the Inventory with FIFO or LIFO Method?
What is the FIFO method?
FIFO stands for “ First In First Out ” and refers to a system that allows the exit of all the oldest merchandise that has entered the business. Therefore, you have a greater control of inventory.
This method is often very useful for those companies that do not want to accumulate merchandise that is not sold. It is important to note that the FIFO method can be used in any type of company, although it is tremendously useful for food businesses, since it avoids the loss of merchandise and a constant inventory renewal is carried out.
What is the LIFO method?
LIFO is the acronym for “ Last to Enter First to Exit ” and refers to a system that facilitates the exit or sale of products that have recently entered the company. Generally, the LIFO method is applied by small companies that do not have a large number of products in their inventory.
Recent merchandise has a new price different from what is still in inventory and thus increases the capital of the company. This method is very useful for those businesses that handle non-perishable products, therefore, it is not recommended for companies of food products, cleaning or personal hygiene.
What is the best way to track inventory with FIFO or LIFO method?
To know the best way to follow the inventory with FIFO or LIFO method, it is convenient that you know how the analysis of the organizations markets is carried out as well as the steps that should normally be developed when following an inventory .
What are the steps to follow an inventory?
A series of steps must be followed in order to successfully conduct an inventory. The first of these consists of identifying the stocks that are going to be taken into inventory by counting the items either manually or by means of a portable reader.
Then, it is necessary to define the places where the inventory is going to be carried out, specify the work team with warehouse knowledge, maintain effective communication , select tools to streamline processes and finally the tour, count and record of all products avoiding inventorying each one more than once.
Follow an inventory: FIFO or LIFO method
If you are going to follow an inventory in a company that has products with an expiration date, it is best to use the FIFO method and take advantage of the strengths of employees to follow the inventory. The method allows keeping the movements of the company updated and obtaining the total cost of all the movements that are made in the warehouse.
Know the cost of the movements separately
By applying the FIFO method you know the cost of movements separately from the warehouse for inputs and outputs, unlike other methods where the average cost is obtained .
Another benefit provided by the application of the FIFO method has to do with accounting validity , that is, the latest production or acquisition prices are recognized according to the type of company. For this reason, the cost of sales is related to the beginning inventory.
If the FIFO method is applied, indispensable reports for any organization can be obtained through the use of a particular program or systems for this purpose such as Kardex.