Differences Between FIFO and LIFO Methods in Warehouse Management

In warehouse management, FIFO (“First In, First Out”) and LIFO (“Last In, First Out”) are essential methods for inventory control and cost allocation in logistics processes. These methods, widely used in accounting and logistics, dictate how goods are recorded and valued based on their entry or exit order, significantly influencing operational efficiency and profitability.

Below, we explore the key differences between FIFO and LIFO. Take note!

FIFO and LIFO: Understanding These Inventory Management Methods

FIFO and LIFO are inventory management methods that determine the order in which products are recorded and sold in a warehouse, affecting costs and logistics efficiency.

• FIFO (“First In, First Out”): This method prioritises the exit of goods that were first added to the inventory. It is commonly used in industries with perishable goods, such as food and pharmaceuticals, where rapid turnover helps minimise waste. In accounting, FIFO often shows a higher inventory value during inflationary periods, as older product costs are lower.
• LIFO (“Last In, First Out”): This method prioritises the exit of the most recently added goods. It is beneficial in industries where acquisition prices rise over time, as it reflects higher product costs in sales, reducing taxable profits.

Advantages of FIFO and LIFO Methods

Each method offers unique benefits depending on the product type and the company’s goals. Here are the main advantages of each method:

Advantages of the FIFO Method:

1. Reduction of Obsolescence: Prioritising older goods reduces the risk of expired or outdated inventory, especially for perishable products.
2. Optimised Inventory: Ensures a steady rotation of goods, ideal for sectors with high turnover or limited shelf life.
3. Accurate Inventory Valuation: Reflects more recent costs, aligning inventory value with current replacement costs.
4. Compliance with International Standards: Widely accepted under global accounting standards like IFRS.

Advantages of the LIFO Method:

1. Tax Benefits During Inflation: Allocating higher recent costs to sold goods can reduce taxable profits.
2. Ideal for Non-Perishable Products: Suitable for industries handling durable goods like construction materials.
3. Efficient Inventory Management in Certain Sectors: Helps align sales costs with recent price changes in volatile markets.
4. Simplified Inventory Management: Reduces rotation frequency, efficient for low-turnover inventories.

Key Differences Between FIFO and LIFO

Sales Order:

• FIFO: Goods that enter first are sold first, ensuring older items are used or sold before newer ones.
• LIFO: Newer goods are sold first, potentially leaving older items in stock longer.

Risk of Obsolescence:

• FIFO: Reduces the risk by prioritising older stock.
• LIFO: Increases the risk as older items remain in inventory longer.

Price Impact:

• FIFO: Reflects current inventory costs, aligning with replacement prices during inflation.
• LIFO: Records higher costs for goods sold, reducing taxable profits.

Tax Implications:

• FIFO: May lead to higher taxable profits in inflationary contexts due to lower costs of older goods.
• LIFO: Reduces taxable profits by using higher recent costs.

Application by Product Type:

• FIFO: Commonly used for perishable or high-turnover products like food and pharmaceuticals.
• LIFO: Suitable for durable, low-turnover products where freshness is less critical.

In summary, FIFO and LIFO impact a company’s accounting, operational, and fiscal strategies differently, making the choice dependent on product characteristics, price variations, and organisational goals.