How you value stock decides your cost of goods sold (COGS), your profit and the value of closing inventory. Two common methods are FIFO and weighted average.
FIFO (first in, first out)
FIFO assumes the oldest stock is sold first. Closing stock is therefore valued at the most recent purchase prices.
Weighted average
After each purchase, a new average cost per unit is calculated: total cost divided by total units. Sales are costed at that average.
Worked example
You buy 10 units at 100, then 10 units at 120, and sell 12 units.
| Method | COGS for 12 units | Closing stock (8 units) |
|---|---|---|
| FIFO | 10 × 100 + 2 × 120 = 1,240 | 8 × 120 = 960 |
| Weighted average (average 110) | 12 × 110 = 1,320 | 8 × 110 = 880 |
When prices rise, FIFO shows a lower COGS and a higher profit than weighted average; when prices fall, the reverse.
Which should you use?
- FIFO matches the physical flow of goods that expire or age and gives clear lot-level traceability.
- Weighted average smooths out price swings and is simple for bulk goods.
Accounting rules and tax treatment can limit your choice in some jurisdictions, so ask your accountant.
In Onyx Bills
Every purchase line creates a new FIFO stock lot, so costs follow the stock and the oldest lots are drawn down first. Each lot has a source trail. See inventory management guide.
Frequently asked questions
Does FIFO mean I must physically ship the oldest stock first?
No, it is a costing assumption. For perishable goods, though, selling the oldest stock first is also good practice.
Can I switch methods?
Changing methods generally needs justification and consistent application. Ask your accountant first.
What is LIFO?
Last in, first out. It is not permitted under some accounting frameworks, so check the rules that apply to you.
This guide is general information, not accounting, tax or legal advice. Rules and rates change, so confirm the current position with a qualified professional.