Costing Methods

When inventory costs change over time, you need a method to determine which costs to use for COGS calculations.

Why Costing Methods Matter

If you buy products at different prices over time, which cost do you use when you sell one?

Example:

• January: Bought 10 units at $5 each
• February: Bought 10 units at $7 each
• March: Sold 5 units

Which cost applies to those 5 sold units? Your costing method determines this.

FIFO (First In, First Out)

The oldest inventory costs are used first.

How It Works

Inventory: 10 units @ $5, then 10 units @ $7
Sale: 5 units
COGS: 5 × $5 = $25 (uses oldest cost)

Advantages

• Matches physical flow for most businesses
• Higher profits in inflationary periods
• Lower taxes in deflationary periods
• Widely accepted globally

Disadvantages

• Higher tax liability when costs rise
• May not reflect current replacement costs

Best For

• Perishable goods
• Fashion/seasonal items
• Most ecommerce businesses

LIFO (Last In, First Out)

The newest inventory costs are used first.

How It Works

Inventory: 10 units @ $5, then 10 units @ $7
Sale: 5 units
COGS: 5 × $7 = $35 (uses newest cost)

Advantages

• Lower profits (and taxes) when costs rise
• COGS reflects recent market prices
• Tax advantages in inflationary periods

Disadvantages

• Not allowed under IFRS (international standards)
• Doesn't match physical inventory flow
• Inventory values become outdated

Best For

• Some US businesses for tax purposes
• Non-perishable commodities

Average Cost

Uses the weighted average of all inventory costs.

How It Works

Inventory: 10 units @ $5, then 10 units @ $7
Average: (10×$5 + 10×$7) ÷ 20 = $6 per unit
Sale: 5 units
COGS: 5 × $6 = $30

Advantages

• Simple to calculate and understand
• Smooths out price fluctuations
• Good for fungible inventory
• Widely accepted

Disadvantages

• May not reflect actual inventory flow
• Can mask cost increases
• Requires recalculation with each purchase

Best For

• Commodities and raw materials
• Products with frequent price changes
• Businesses wanting simplicity

Comparison

Choosing in CostSync

Set your costing method in Settings:

1. Go to Settings > Costing Method
2. Select your preferred method
3. Click Save