What is FIFO (First-In, First-Out)
FIFO (First-In-First-Out) is an inventory valuation and management method in which the oldest stock is sold or used first. This ensures that you move stock before it becomes obsolete or expires, reducing waste and increasing profitability.
How Do You Calculate FIFO?
The First-In-First-Out (FIFO) method calculates your Cost of Goods Sold (COGS) by assigning the cost of your oldest inventory items to your most recent sales.
The basic formula for the FIFO method:
COGS = Quantity of oldest items sold × Their original purchase cost
In practice, this means you assume your earliest inventory items are sold first. Once that batch runs out, you apply the cost per item from the next oldest batch until all units sold are accounted for. This approach keeps your stock records accurate and ensures your oldest inventory costs are recognized before newer ones.
What Is an Example of FIFO?
Let’s say your Shopify store sells coffee beans. In January, you purchase 50 bags at $5 each and sell 20. In February, you buy another 50 bags at $6 each and sell 40 more.
Using the FIFO method, you assume the oldest stock is sold first:
- 20 × $5 = $100 (January)
- 30 × $5 = $150, and 10 × $6 = $60 (February)
Total COGS = $310
This method ensures your oldest inventory costs are recorded first, keeping your cost of goods and profit margins accurate.
When using an ecommerce accounting integration such as MyWorks, FIFO inventory values automatically sync, ensuring your QuickBooks or Xero reports consistently show accurate batch costs.
What Are the Pros and Cons of FIFO?
Like any inventory method, FIFO has advantages and trade-offs, especially for ecommerce businesses managing fast-moving products.
Pros:
• Reduces waste and prevents outdated or expired inventory
• Keeps product valuations aligned with changing supplier costs
• Matches inventory records with fulfillment orders for greater accuracy
• Improves customer satisfaction by ensuring fresher or newer stock ships first
Cons:
• Can be harder to manage manually for large product catalogs
• Requires consistent tracking to avoid mismatched inventory costs
• Doesn’t offer short-term tax advantages like the LIFO method
When Should Businesses Use the FIFO Method?
FIFO is best suited for businesses that sell products with limited shelf life or fluctuating supplier costs. It’s especially valuable for ecommerce retailers managing perishable, seasonal, or high-turnover inventory.
You’ll typically choose FIFO over LIFO if you sell:
- Food, beverages, or supplements
- Cosmetics, skincare, or pharmaceuticals
- Seasonal or trend-based items such as clothing, electronics, or home décor
Even if your products are non-perishable, FIFO can simplify stock management by ensuring older batches move first and warehouse data stays consistent.
When your Shopify or WooCommerce store connects through MyWorks, FIFO inventory values automatically sync to QuickBooks or Xero: saving time, reducing errors, and keeping your reports accurate.