FIFO (First-In, First-Out) is a type of inventory management strategy where products are purchased and added to the inventory at the back of the queue, and sold in the order they were added to the queue.

How FIFO works:

1. Products are added to the back of the queue: When new products are purchased, they are added to the end of the inventory queue.
2. Products are sold from the front of the queue: When products are sold, they are removed from the front of the queue.
3. The cost of goods sold is based on the cost of the oldest inventory items: The cost of goods sold is calculated based on the cost of the oldest items in the inventory.

Advantages:

• Simplicity: FIFO is a simple inventory management strategy to implement and maintain.
• Lower cost of goods sold: Under FIFO, older inventory items are sold first, which can result in lower cost of goods sold compared to other inventory management strategies.
• Less obsolescence: FIFO can reduce obsolescence risk, as older items are less likely to become obsolete.

Disadvantages:

• LIFO effect: FIFO can create a LIFO (last-in, first-out) effect, where the cost of goods sold increases in the future as new items are added to the inventory.
• Inventory write-offs: FIFO can increase inventory write-offs if older items become obsolete.
• Inventory turnover: FIFO can increase inventory turnover, as older items are sold first, even if they are not yet expired.

Examples:

• If you purchase five apples on January 1st for $1 each and ten apples on January 2nd for $2 each, the FIFO method would result in the following inventory:

  • January 1st: 5 apples at $1
  • January 2nd: 10 apples at $2

• When you sell the apples, they will be sold in the order they were purchased.

Applications:

FIFO is commonly used in industries with high inventory turnover and low obsolescence risk, such as retail, manufacturing, and construction.