Understanding FIFO for Consumer Brands
When managing product costs, brands need a clear and consistent methodology for calculating Cost of Goods Sold (COGS). One commonly used method is First-In, First-Out (FIFO).
FIFO determines COGS based on the assumption that the oldest purchased units are sold first. This impacts how costs are assigned to units sold and how profitability is reflected in financial reporting.
FIFO Landed Costs
FIFO accounting assumes that the oldest inventory items are sold first. This method is beneficial in environments where prices fluctuate, as it aligns inventory costs with actual cash flows. For consumer brands, using FIFO can simplify cost tracking and reporting, making it easier to assess profitability. However, in times of rising costs, FIFO may inflate profits on paper, leading to potential tax implications.
Example
Jan 1: 100 units purchased at $1
Jan 5: 100 units purchased at $2
Jan 10: 100 units sold
Under FIFO, the 100 units sold would be costed at $1 per unit, since those were the earliest purchased units.
If an additional 100 units were sold, they would be costed at $2 per unit.
Why Brands Use FIFO
FIFO can be helpful in environments where:
Costs fluctuate over time
Brands want cost flow to reflect purchase chronology
Financial reporting needs to align with traditional accounting methods
In rising cost environments, FIFO may show higher profits in the short term because older, lower costs are assigned to COGS first.
Choosing the Right Costing Approach
The best costing method depends on your business model and financial reporting needs.
If you’re unsure which approach is appropriate for your brand, your Settle representative can help guide you based on your operational setup and reporting goals.