FIFO First In First Out

"FIFO" stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but it does not necessarily mean that the exact oldest physical object has been tracked and sold.

In other words, the cost associated with the inventory that was purchased first is the cost expenses first.

With FIFO, the cost of inventory reported on the balance sheet represents the cost of the inventory most recently purchased.

Consider this example: Foo Co. had the following inventory at hand, in order of acquisition in November:

Number of unitsCost
100 units$50
125 units$55
75 units$59
  • If Example Co. sells 210 units during November, the company would expense the cost associated with the first 100 units at $50 and the remaining 110 units at $55. Under FIFO, the total cost of sales for November would be $11,050.
  • The ending inventory would be calculated in the following way:
Number of unitsPrice per unitTotal
Remaining 15 units$55$825 ($55 x 15 units)
75 units$59$4425 ($59 x 75 units)
Total
$5250
  • Thus, the balance sheet would now show the inventory valued at $5250.

(star)See source: https://en.wikipedia.org/wiki/FIFO_and_LIFO_accounting

Matching Theoretical and Ideal for FIFO COGS

IvA and TvA both use the same calculation for actual usage quantities (BI +Pur-EI=Usage).  

The actual dollars portion of TvA can appear skewed due to changes in ingredient pricing from week to week when compared to theoretical usage dollars, which are priced at a single value. 

Market Value / NON- FIFO  

  • TvA says that I used $400 in product X and IvA says I used $200 in product X, why is there such a large variance?

         A.  TvA is better served as an accounting analysis tool and to identify potential items to add to IvA reporting.

         B.  For example, if you inventory a $50 case of tomatoes this week, and a $40 case of tomatoes next week, and have zero waste the price change results in $10 additional dollars of actual usage.  

  • It is Decision Logic’s recommendation that TvA not be used as an inventory variance investigation tool. 
  • IvA is our recommended tool for Inventory Variance investigation because IvA focuses on product waste, not pricing, which is something that managers cannot impact nor control. 
  • Managers CAN impact and manage product usage.

FIFO Steps for Validation

  • Decision Logic has a FIFO method which allows for the application of depleting the inventory at the correct inventory value and not changing the value of inventories based on the current, or “market” value. 
  • To show the validation of FIFO for cases of discrepancies, see below::  
  • First, go to COGS Reports > COGS > Select Store > Select Start and End Period/Week 
    1. Choose “Category” i.e. Ribs Chicken > Chic and Rib - Chicken (split whole) raw  

  • Add Beginning inventory dollar amounts together.  $62.58 + $246.07= Beginning Inventory $308.65
  • Next, drill down into each purchase to expand the purchase detail. Look for purchases of Chic and Rib (for this example) and dollar amounts

  • Next, navigate to Reports > All Food IvA > Select same store and date range
  • Find the same category as COGS, i.e. “Meat Sliced” and Drill down on the chosen item, “Sliced Meat – Smoked Turkey” 
  • Determine how much of the purchases used for Ideal usage
  • Ideal usage qty – Beginning Inventory qty  - First Order – etc.
  • $$ 308.65 – $129.47= $15.79.  This is less than the first order.  So Ideally, this store used all of the beginning inventory and just began to use the first purchase. 
  • The first purchase, according to the COGS purchases area, totaled $66.43 for a quantity of 20.76 lb.  $66.43 divided by 20.76 lb = price/lb of $3.199 or $3.20.
  • Therefore,  $3.199 * 15.79 (qty used of the first purchase 9) = $50.53
  •  $398.22 + $50.53 = $448.75
  • View TA Store Summary
  • Select the same store and date range
  • Select Recipe Costs
  • Find the same item “Meat Sliced – Smoked Turkey”  under the same category “Meat Sliced”
  • TvA Theoretical cost should match the IvA Ideal from the above equation.
  • $448.75 and $448.74 could be off by 1-2 cents from rounding issues.  

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