FIFO is a method of keeping track of inventory and costs, where the oldest items purchased are considered to be the ones sold first.
This can help businesses keep a better handle on their expenses and taxes, especially if prices change over time.
Business Scenario:
Consider a business situation where a company buys the same item on four different dates within a month, each time at a different price.
At the end of the month, when they post the sales invoice, what will be the COGS amount, and what will the GL entries look like for all these transactions?
Purchase1: Posting Date 01-Sep-2023 at Price 25.76 Qty. 1000
Purchase 2: Posting Date 05-Sep-2023 at Price 28.50 Qty. 750
Purchase 3: Posting Date 11-Sep-2023 at Price 30.20 Qty. 550
Purchase 4: Posting Date 18-Sep-2023 at Price 32.50 Qty. 300
After posting all the above purchase scenarios below are the Item ledger entries and Value ledger Entries:
When you check Unit Cost and Last Direct Cost on the Item Card page:
Unit Cost – The calculation of this particular field is based on Average.
Cost Amount Actual / Total Available Qty. (73495/2600 = 28.267)
Last Direct Cost – This field will be updated based on your last purchase price. If you check Purchase Scenario 4 then you can see the last purchase price is 32.50
The diagram below depicts the division of Item Ledger Entry and value when a Sales Invoice is recorded.
Sales Invoice 1: Posting Date 20-Sep-2023 at Selling Price 45 Qty. 750
In Value entries, the Entry type is created as Direct Cost and there is one additional line that comes as Adjustment and Adjustment Boolean true.
Adjustment line posted because first COGS posted based on Unit Cost (28.267) and to fix COGS correctly adjustment automatically posted.
Unit Cost – Adjustment Cost = COGS Cost
28.267 – 2.507 = 25.76 (This is the Purchase price if you check Purchase 1)
Sales Invoice 2: Posting Date 25-Sep-2023 at Selling Price 50 Qty. 1500
Below are the Item ledger entries and applied entries of sales shipment. Where Open Boolean is true means there is remaining quantity exist.
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