3.2Valuation methods: FIFO, LIFO, WAC
The essentials in 30 seconds
- Valuation = price convention: FIFO uses up the oldest, WAC smooths at average cost, LIFO often forbidden.
- When prices rise, FIFO shows more margin and stock at recent prices; WAC gives an intermediate, stable result.
- Valuation ≠ physical rotation: you can value at WAC and move cartons in FIFO, FEFO if dated.
Running mini-case — Nadia compares two margins without selling more
Nadia imports two batches of an ingredient at €10 then €12 and sells 100 units at €15. In FIFO her margin shows €500, in WAC €400 — same sale, same cartons moved. She understands the method shifts profit between periods. In the store, she enforces physical FIFO and FEFO on short-dated batches.
Continued from case 3.1 — Nadia separates the accounting figure from the store gesture.
1. FIFO, WAC, LIFO: three price conventions
When purchase prices vary, at what price do you record the unit leaving? FIFO (First In, First Out) issues the oldest lots: remaining stock is valued at the most recent prices. WAC (weighted average cost) recalculates the average cost at each receipt (total value ÷ total quantity): all issues use the average cost — it smooths variations.
LIFO (Last In, First Out) values issues at recent prices and stock at old prices: know how to read it, but remember it is banned by many standards (IFRS and rules in many countries) — mostly historical and jurisdiction-dependent tax interest.
When prices rise, FIFO shows more margin (you sell at today's price items bought cheaper) and better-valued stock; WAC gives intermediate, stable results. The choice belongs to your local framework and your accountant.
2. Valuation is not physical rotation
Crucial distinction: accounting valuation decides at what price issues are recorded; physical rotation decides which carton you take from the shelf. The two are independent: you can value in WAC and physically issue in FIFO — the most common setup.
Physically, the rule is almost universal: physical FIFO — oldest lots leave first to avoid ageing and obsolescence at the back of the rack.
For dated products (food, cosmetics, pharma), refine with FEFO: First Expired, First Out — the shortest date leaves first, which is not always the oldest lot. FEFO requires lot management with dates and slotting that makes it natural.
3. Organise rotation on the ground
Make age visible: date each carton on receipt, colour-code by quarter. Slot so the right move is the easy move: load at the back, pick at the front — flow racking that makes FIFO automatic.
Let the system carry the rule (WMS/ERP): it directs the picker to the oldest lot (FIFO) or the shortest date (FEFO). Rotation becomes an instruction, not an initiative.
Control with data: list lots by age and track those sitting still — physical FIFO is verified, never decreed. Remember: valuation belongs to the accountant, rotation belongs to the storekeeper.
🔎 Concrete example — The same sale, two reported margins
100 units at 10 € then 100 at 12 €. Sale of 100 at 15 €: in FIFO, cost of sales 1 000 € → margin 500 € and remaining stock 1 200 €; in WAC (11 €), cost 1 100 € → margin 400 € and stock 1 100 €. A 100 € gap with no different physical move, reversed once everything is sold.
Lesson: never compare margins without knowing the method; profit allocation between periods changes.
Ground: whatever the accounting choice, physically rotate in FIFO (FEFO if dated).
Section vocabulary
- FIFO (valuation)
- First in, first out: issues at the price of the oldest lots; remaining stock at recent prices.
Simple example: Nadia issues the €10 batch first: her margin shows €500 and her remaining stock is worth €1,200.
What it is not: physically taking the carton at the back because "it is the same".
Reflex: check the method with the accountant before comparing two margins.
- WAC
- Weighted average unit cost: each receipt recalculates the average cost (total value ÷ total quantity); issues at average cost — smoothing.
Simple example: Nadia recalculates (1,000 + 1,200) ÷ 200 = €11: issues at €11, smoothed result.
What it is not: changing method every year to flatter the result.
Reflex: apply the same method consistently and have it approved.
- LIFO
- Last in, first out: issues at recent prices, stock at old prices; banned by many standards (IFRS).
Simple example: Nadia can read it on foreign documentation but does not apply it without local approval.
What it is not: adopting LIFO without checking its validity in her local framework.
Reflex: ask the accountant what is allowed before any choice.
- Physical FIFO
- Physical rotation of goods: oldest lots leave first — independent of accounting valuation.
Simple example: Nadia dates each carton on receipt and loads from the back to pick from the front.
What it is not: letting old batches sleep at the back until obsolescence.
Reflex: make age visible: date + colour per quarter.
- FEFO
- First Expired, First Out: shortest expiry date leaves first; requires lot-level management.
Simple example: Nadia issues the short-dated batch first even if it is not the oldest.
What it is not: blindly applying FIFO on dated products and throwing away expired goods.
Reflex: check dates on receipt and slot to pick short dates first.
In practice — Clarify valuation and physical rotation
- Identify your valuation method (WAC? FIFO?) with the accountant and its justification.
- On a variable-price item, recalculate one issue in FIFO then in WAC: note the reported-margin gap.
- Physically: check oldest lots leave first (date cartons) — hunt those sleeping at the back.
- For dated products: switch to FEFO — check dates on receipt and slot to pick short dates first.
Ready-to-say script — getting the method approved and enforcing FIFO (1 min)
"For our moving prices, I propose keeping the WAC approved with the accountant for valuation, and enforcing physical FIFO — FEFO on dated batches — in the store: dates on each carton, we pick from the front. We will no longer mix prices and cartons."
One sentence for the accountant (method), one for the store (gesture): the two decisions are separate.
Copy-paste template — valuation / rotation card
ITEM: _______________
VALUATION METHOD (approved by accountant): _______________
PHYSICAL ROTATION (FIFO / FEFO): _______________
VISIBLE AGE (date + colour on receipt): _______________
CHECK (dormant batches listed on): _______________VSE / small budget
No ERP: date with a marker on each carton and an "always pick from the front" rule posted on the rack.
Algeria SME
Variable import prices and control: have FIFO/WAC approved by the accountant under the applicable local framework.
Dated agri-food
Switch to FEFO: batch management with dates on receipt and picking shortest dates first.
Undated parts
Stay with simple physical FIFO: colour code per quarter and flow racking if possible.
✓ Best practices
- Have the FIFO/WAC choice approved by the accountant: legal framework and consistency of methods.
- Visibly date each lot on receipt: with no visible age, no FIFO is possible.
- Prefer flow racking (load at back, pick at front) to make FIFO automatic.
✗ Common pitfalls
- Confusing valuation and rotation: changing the accounting method does not physically rotate stock.
- Using LIFO without checking local validity: often banned — adjustment risk.
- Letting two codes coexist for the same item: rotation and valuation become unmanageable.
Key takeaways
- Valuation = at what PRICE issues are recorded: FIFO (old out, recent in stock), WAC (smoothed average), LIFO (often banned).
- When rising, FIFO shows more margin, WAC smooths: the choice changes profit — check the legal framework.
- Valuation is not physical rotation: independent — you can value in WAC and rotate in FIFO.
- Physically: always FIFO, FEFO for dated products — with lot management.
48h Challenge — apply tomorrow
Like Nadia: date 10 cartons on receipt and pick from the front (FIFO, FEFO if dated). Recalculate one issue in FIFO then in WAC on one item: observe the gap.
- I can explain FIFO, WAC and LIFO in one sentence each.
- I separate accounting valuation from physical rotation.
- I dated cartons and checked the oldest leave first.
Frequently asked questions
Why does the method change profit with nothing changing in reality?
Because profit is a conventional measurement: the choice assigns prices to issues or to remaining stock. Over the full life (everything sold), total margins converge; only allocation between periods differs. Hence the consistency requirement.
How do you ensure the oldest leave first?
Through organisation: visible age (dates, colours), "load at back / pick at front" slotting or flow racking, and system guidance (WMS) to the oldest lot or the shortest date. The rule built into slotting applies itself.
Which physical rule prevents ageing at the back of the rack?