Why FIFO Inventory Costing Matters for Distributors
Understanding the difference between FIFO and Weighted Average COGS, and why First-In-First-Out provides the most accurate financial picture during inflation.
Why FIFO Inventory Costing Matters for Distributors
When a B2B distributor sells a product, calculating the profit margin isn't as simple as subtracting the cost from the sale price. Why? Because the cost of purchasing that inventory from suppliers fluctuates constantly.
The Two Main Approaches
1. Weighted Average Cost
This method blends the cost of all units currently in the warehouse. If you bought 10 laptops at $500 and 10 laptops at $600, your average cost is $550. Pros: Very simple to calculate. Cons: It smooths out recent price hikes, potentially obscuring your actual current margins.
2. FIFO (First-In, First-Out)
This method assumes that the oldest inventory (the first items you bought) are the first ones you sell. Pros: In times of inflation, it accurately reflects that you are selling the cheaper stock you bought months ago, giving you a highly accurate picture of your Cost of Goods Sold (COGS). Cons: Requires advanced software to track discrete "lots" of inventory.
How WMS Biz Helps
WMS Biz natively supports strict FIFO costing. Every time you receive a Purchase Order, the system logs the exact unit cost in a distinct "inventory lot". When your warehouse team packs an order, the system automatically deducts from the oldest lot first, ensuring your financial analytics and margin reports are perfectly accurate down to the penny.