First In First Out and Last in First Out are the two most common inventory management concepts used in the modern world. These two models are different from each other, but both concepts are specifications of inventory management methodologies. Here we shall discuss what is meant by each and what types of businesses can use these formats for their business 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, milk is stored according to its expiration dates in the fridge. The milk cartons that are close to expiring dates would be stored in the front to get sold first.
The main aim of this concept of inventory management ensures 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 and 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 costs fluctuations. The cost approximates the current market value of inventory available in the warehouse is quickly revealed due to stock-taking procedures.
The flow of costs agrees with the actual flow of physical products or goods. Due to its applicable ease and implementation, businesses do not choose which unit is to be delivered, as inventory management is automated. For urgent basis orders, it helps contain and arrest shipping issues.
Cons Of FIFO
Using caution when applying the FIFO method for all business endeavors is strongly recommended. 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 patterns of growth.
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 before they notice discrepancies in statements if care is not taken with the rising and falling of 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 last items sent to stock are the first ones 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 periodical Cost of Goods Sold (COGS) and an appraisal of inventory.
Pros of LIFO
With substantial tax advantages, LIFO is excellent for companies in the manufacturing industry. Using LIFO, it’s presumed that all goods sold are what’s lying in the inventory, whereas 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 stocks manufacturers, oil and gas sectors, power generation, and the transportation industry.
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 derive loss of money. Thus, it slows down growth. LIFO runs inventory and needs more complex records and advanced accounting practices. 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 which have later expiry dates. Shelved artifacts which 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. Efforts have been undertaken to repeal the LIFO standards in the US, but only further restrictions are seen with recent trends.
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