Stock Valuation Policies: AVCO, LIFO, and FIFO

These methods are used to value inventory and determine the cost of goods sold (COGS). They are critical for financial reporting, taxation, and internal management.

1. FIFO (First-In, First-Out)

• Concept:

• The first items purchased (oldest inventory) are assumed to be sold first.
• Remaining inventory consists of the most recently purchased items.
• Use Case:

• Common in businesses where inventory items are perishable or have an expiration date (e.g., food or pharmaceuticals).
• Example:

• COGS for 50 Units Sold: 50 × $10 = $500.
• Remaining Inventory: 50 units @ $10 + 100 units @ $12.

• Advantages:

• Matches physical flow of goods in many cases.
• Results in lower COGS and higher profits during inflation (higher tax liability).
• Disadvantages:

• Not ideal during inflation as it may overstate profits.

2. LIFO (Last-In, First-Out)

• Concept:

• The last items purchased (newest inventory) are assumed to be sold first.
• Remaining inventory consists of the oldest items.
• Use Case:

• Common in industries with non-perishable goods and where companies aim to reduce taxable income during inflation.
• Example:

• COGS for 50 Units Sold: 50 × $12 = $600.
• Remaining Inventory: 100 units @ $10 + 50 units @ $12.

• Advantages:

• Higher COGS during inflation, leading to lower taxable income.
• Matches current costs with current revenues.
• Disadvantages:

• Results in lower profits during inflation.
• Not allowed under IFRS (International Financial Reporting Standards).

3. AVCO (Average Cost Method)

• Concept:

• The cost of inventory is averaged, and each unit sold or remaining is valued at the average cost.
• Formula:

Average Cost per Unit = Total Units Available/Total Cost of Inventory​

• Use Case:

• Suitable for industries where inventory is indistinguishable (e.g., grains, liquids, or fuel).
• Example:

DateUnits PurchasedCost per UnitTotal CostJan 1100$10$1,000Jan 5100$12$1,200

• Total Units: 200.
• Total Cost: $2,200.
• Average Cost per Unit: $2,200 ÷ 200 = $11.
• COGS for 50 Units Sold: 50 × $11 = $550.
• Remaining Inventory: 150 units @ $11.
• Advantages:

• Smoothens out price fluctuations.
• Simple to calculate and apply.
• Disadvantages:

• Less accurate in matching current costs with revenues.
• Not reflective of actual physical inventory flow.

Comparison

Each method suits different business models and financial strategies.

Updated on: 15/07/2026