Understanding FIFO Landed Costs vs. Batch-Based Landed Costs for Consumer Brands
When managing inventory, consumer brands often face the decision between different methodologies to calculate landed costs, primarily Weighted Average Cost (WAC) and Batch-based Landed Cost (also known as FIFO Landed Cost). These methods significantly impact how costs are calculated and can influence pricing, profitability, and inventory management. Settle now provides the flexibility to select the inventory costing method that best suits your business needs, with certain limitations based on your subscription tier and integrations.
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 Your Inventory Costing Method in Settle
Settle allows you to select your preferred inventory costing method within your business settings. This choice dictates how your Cost of Goods Sold (COGS) is calculated and which inventory reports are available to you.
Accessing the Setting: Navigate to Settings > Accounting (or a similar path to be determined by UI design). You will find an option to select your costing method.
Tier-Based Availability:
Launch Tier Customers: Customers on the Launch plan are automatically set to Weighted Average Cost (WAC). To unlock the more granular Batch-based Landed Cost (FIFO), you will see an in-app prompt to upgrade to Accelerate or Elevate. When set to WAC, you will see the Product Cost Report (PCR).
Accelerate & Elevate Tier Customers (without A2X or Shopify landed cost push): If your business is on an Accelerate or Elevate plan and does not have an active A2X integration or is not pushing landed costs to Shopify, you will have the option to freely choose between Weighted Average Cost (WAC) and Batch-based Landed Cost (FIFO).
When WAC is selected, you will see the Product Cost Report (PCR).
When Batch-based Landed Cost (FIFO) is selected, you will see the End of Month (EOM) Inventory Report.
Accelerate & Elevate Tier Customers (with A2X or Shopify landed cost push): If your business is on an Accelerate or Elevate plan and has an active A2X integration or is configured to push landed costs to Shopify, your costing method will be automatically set to Weighted Average Cost (WAC). This is because these integrations currently only support WAC. A tooltip will provide this explanation in the app. You will see the Product Cost Report (PCR).
Important Note on Recalculation: When your costing method is changed by an eligible user, Settle will not recalculate historical COGS based on the newly selected method, and your previously shown reports will not change. This change applies to future calculations only. A backfill process will ensure data consistency when this feature is launched.
IRS Implications: "Changing your landed cost calculation method can have significant tax implications and may require filing extra paperwork with the IRS. Please consult with your tax professiona
Choosing the Right Method
The right costing method depends on your operational needs and business model:
FIFO is well-suited for fast-moving consumer goods and fluctuating cost environments.
Batch-based is ideal for businesses managing perishable goods, regulated inventory, or products requiring detailed batch tracking.
WAC provides a simplified, averaged view of inventory costs and is often required for integration compatibility.
If you're unsure which method best suits your business, your Settle customer success representative can help you evaluate your options.