Differences between FIFO, FEFO, LIFO and Average Methods in Goods Management

Behind the success of a business or company there are various factors that influence it. Running a business is not an easy matter, there are many aspects that need to be considered, one of which is inventory management or goods management.

What is Inventory Management?

Inventory management is the activity of controlling, supervising and managing inventory (non-capital assets) and stock of goods. Every business actor, especially those operating in the production sector, really needs to implement this management for the smooth running of the business.

Inventory/goods management is part of supply chain management which aims to monitor the flow of stock of goods from the purchasing process, storage (entering the warehouse), to the point of sale (leaving the warehouse).

Every flow of goods needs to be recorded carefully to avoid fatal errors that could have a negative impact on the company.

The main benefit of the importance of inventory management is to anticipate delays and running out of inventory, if at any time the stock is difficult to find on the market.

Methods in Goods Management

Managing company stock requires quite complex, strategic and systematic handling, especially for large organizations or companies. Accuracy and strategy are needed in determining the useful life of goods based on their expiration date.

This is done to avoid the accumulation of stock that is no longer suitable for sale, distribution or used as raw material in the production of finished products. That's why you need to know how to manage stock or inventory stored in the goods warehouse.

Every business has its own inventory management method. Managing goods using the wrong method will result in poor quality of stock, products produced and the name of the company. The various goods management methods include:

Method FIFO

FIFO (First In First Out) is an inventory management method by using stock items in the warehouse according to the time they arrive. The stock that first enters the warehouse is the stock that must first leave the warehouse.

The reason is so that the first inventory can be sold or used immediately so that it doesn't spoil quickly because it has been stored in the warehouse for too long. The application of this method is considered very easy and relevant to the physical flow of stock in the storage warehouse.

The FIFO method is usually also used to determine Cost of Goods Sold (COGS), because this method involves the assumption that the product is the oldest stock item recorded in the company's asset inventory.

In essence, the method of determining the cost of a product is adapted to the concept that the cost of entering stock must be the same as the sales proceeds from the old/first incoming stock. So, the company will use old stock as the first product to be sold.

The types of companies that can apply this management method are business entities operating in the FnB (food and beverage) sector, medicines and other types of products that have expiration dates.

Method FEFO

FEFO (First Expired First Out) is a method of managing goods by removing or utilizing goods that have the closest expiry date first. The closer the expiration date is, the sooner it will leave the warehouse.

This management method is considered effective because it can prevent storing stock that is almost expired for too long. This can also avoid potential losses because you can utilize all inventory effectively.

The FEFO method is often used by companies operating in the retail, food, beverage, pharmaceutical and other types of supplies or products that have an expiration date.

LIFO Method

LIFO (Last In First Out) is a goods management method that is the opposite of FIFO. Inventory management using this method is carried out in a way that the last item to enter the warehouse is the first item to leave the warehouse for sale.

Not without reason, this method is carried out in order to take advantage of a momentum to reap many benefits. For example, a fashion industry will take out its newest stock of clothes from storage because it is becoming a trend on the market.

The LIFO method determines the final purchase price based on operations in a period of inflation (price increases). This causes the profits and taxes obtained by the company to be relatively small. Apart from that, LIFO can no longer be used based on the provisions of PSAK 14.

Metode Average

The average method can also be known as weighted average. The way to determine this method of managing goods is to divide the cost of goods to be sold by the number of units available. This method produces the average price of each unit of goods to be sold.

This goods management method applies the average price to the ending inventory of goods in the warehouse and the cost of goods sold from the first goods leaving the warehouse. In general, the average method is a combination of the LIFO and FIFO methods.

Simply put, the application of the weighted average method only focuses on the availability of stock in the storage warehouse without paying attention to which stock is entered first and which is entered last in the inventory records.

Differences in Goods Management Methods

After reading the four inventory management methods above, you will immediately know the differences between the FIFO, FEFO, LIFO and Average methods in terms of their respective advantages and disadvantages.

You can see the differences between the four methods of managing goods in the table explanation as follows:

	Advantage	Deficiencies
FIFO	The recording of goods in the financial position report corresponds to the stock of goods in the storage warehouse Can produce relatively low COGS (Cost of Goods Sold) with higher gross profit More profitable, logical and reliable The risk of damage or reduction in the quality of goods can be reduced Easy to understand Financial reports tend to be difficult to manipulate	The tax burden that companies must pay to the government tends to be higher Even though it is profitable, the profits generated are usually less accurate The gap between production capital and the profits generated tends to be large
FEFO	Known as the most efficient method and able to reduce potential losses in the company	The FEFO method is known to be almost similar to FIFO
LIFO	Arranging items in storage is much easier Save tax expenses Can gain large sales profits by taking advantage of emerging trends Can compare current costs and income more easily Operating profit is not affected by inflation or price fluctuations	Recording finished goods is more complicated because it is in contrast to the flow (in and out) of inventory in storage Bookkeeping costs tend to be high due to the application of complicated methods The profits generated are relatively low
Average	Can determine the value of goods based on what is available in the storage warehouse without being tied to the time the goods arrive	The level of complexity is quite high compared to the other three methods

In general, goods management methods can be applied according to the field of business you run. Each method has its own way of working, advantages and disadvantages. If you understand your type of business, then consider management methods carefully.

The important thing you need to do is make careful records and ensure that stock availability is guaranteed for the smooth process of production, distribution, sales, and so on. Good inventory management reflects good service quality as well.