First In, First Out, and Last in, First Out are the two most common inventory management concepts today. These two models are different, but both ideas are specifications of inventory management methodologies. Here, we shall discuss what each means and what types of businesses can use these formats for their operations and needs.
What is FIFO?
The FIFO inventory system uses the same strategy as it is called. First-in items are usually the first to come out of any storage. For example, the fridge stores milk according to their expiration dates. The milk cartons bearing close expiry dates would be stored in the front so those get sold first. The main aim of this concept of inventory management is to ensure that the oldest stock is moved out first to guarantee cost-effectiveness and avoid wastage. The widespread use of this concept makes it ideal for many industries that use it along with other stock management models.
Pros of FIFO
With businesses worldwide feeling ramifications of digression, this type of stock management technique offers significant benefits with inventory cost fluctuations. The cost approximates the current market value of inventory in the warehouse and is easily revealed as the result of stock-taking procedures. The flow of costs agrees with the actual flow of physical products or goods. Due to its ease of implementation, businesses do not choose which unit to deliver, as inventory management is automated. For urgent basis orders, it helps contain and arrest shipping issues.
Cons Of FIFO
Use caution when applying the FIFO method for all business endeavors. The results of stock and the image created about costs could not be genuine or authentic. Due to economic instability, the rates and costs are affected. FIFO is implemented while paying considerable attention to details as this method may exaggerate situations to depict profit-making growth patterns.
This appearance of “growth” is the disadvantage of FIFO inventory management as taxes are applied to this “profit,” which heavily burdens a business, thus diminishing growth and stability. Also, it takes accountants months to notice discrepancies in statements if care is not taken with the rising and falling rates and costs. With increased prices that show up in accounts months later, FIFO can be disadvantageous.
What is LIFO?
Last, In First Out is also commonly used, where the previous items sent to stock are the first to come out. An example would be machinery manufacturing, where stocks already prepared and stored are shipped out first rather than newly manufactured fresh out of the rolling mill. It is widely used for non-perishable goods, and this concept of inventory management includes other benefits such as periodic Cost of Goods Sold (COGS) and an inventory appraisal.
Pros of LIFO
With huge tax advantages, LIFO is great for companies in the manufacturing industry. Using LIFO, it’s presumed that all goods sold are what’s in the inventory, where it isn’t always. It also helps tackle inflation predicaments as costs of goods may change heavily if prices of raw materials increase. It also offers a lower balance shown as leftover inventory. With lower tax liability due to a lower rate of income, this type of inventory management is effective in growth. LIFO is ideal for rolling stock manufacturers, oil and gas sectors, power generation, and transportation industries.
Cons of LIFO
Due to the challenges in maintenance, LIFO is a bit more technical, as older inventory can sometimes never be sold or shipped out. This bears encumbrances as accounts can cause a loss of money; thus, it slows growth. The way LIFO runs inventory needs more complex records and advanced accounting practices so that even unsold items in the stock are included for support in the accounting of this system with this inventory management concept.
Grocery stores and restaurants cannot use this concept as it results in the rotting of most of the items that have later expiry dates. Shelved artifacts that are not sold are costly. Also, globally expanding businesses and companies cannot use LIFO due to the difference in accounting standards, which do not follow the LIFO methods. In the US, efforts have been undertaken to repeal the LIFO standards, but with recent trends, only further restrictions are seen.
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