Understanding FIFO Landed Costs vs. Batch-Based Landed Costs for Consumer Brands
When managing inventory, consumer brands often face the decision between the many different methodologies to calculate landed costs. At Settle, we often hear questions about FIFO (First-In, First-Out) landed costs and batch-based landed costs. Both methods impact how costs are calculated and can influence pricing, profitability, and inventory management.
In Settle, we support FIFO Landed costs. If you're interested in Batch-Based Landed Costs, please contact your customer success rep.
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.
Batch-Based Landed Costs
In contrast, batch-based landed costs track inventory based on specific batches or lots. This method provides more granular control, allowing brands to monitor the costs associated with each batch. It's particularly advantageous for companies dealing with perishable goods or products subject to quality control, as it helps manage expiration dates and traceability. However, the complexity of tracking multiple lots can complicate financial reporting and require more sophisticated inventory management systems.
Choosing the Right Method
The choice between FIFO and batch-based landed costs largely depends on your business model and operational needs. If your brand operates in a dynamic market with frequent price changes, FIFO may be the better option. Conversely, if your products have expiration dates or require stringent quality checks, batch-based costs could provide greater control and insight.