FIFO/LIFO and Moving Average calculation difference

Valuation Rate of an item is calculated based on the total expense incurred to make the product available for sale like freight, labour, cost of raw materials, etc.

In ERPNext, Valuation Rate is calculated based on the valuation method selected for the particular item.

An item can have FIFO, LIFO or Moving Average selected as a valuation method in Stock Settings.

Consider the following example to know how it impacts your stock:

Calculating Valuation Rate at the time of sale:

As per FIFO:

Since this is FIFO, we will consume quantities from the earliest transactions, therefore, to make a sale of 15 qty, we will take 10 qty from the first transaction and 5 qty from the second one.

(10 * 100) + (5 * 120) = 1600 which leaves us 5 qty in stock at cost of 120 amounting to 600.

As per LIFO:

While using LIFO, we will consume quantities from the latest transactions first, therefore, to make a sale of 15 qty, we will take 10 qty from the last transaction and 5 qty from the second last one.

(10 * 120) + (5 * 100) = 1700 which leaves us 5 qty in stock at cost of 100 amounting to 500.

As per Moving Average:

In the Moving Average method, the value of an item is recalculated every time when an item is acquired. This is done by adding the cost of the newly acquired items to the existing inventory’s value and then dividing it by the total quantity available.

((10 * 100) + (10 * 120)) / 20 = 110

To make a sale of 15 qty, we will directly multiply it by the average value we received just now.

15 * 110 = 1650 which leaves us 5 qty in stock amounting to 550.