FIFOFirst In, First Out

FIFO stands for First In, First Out — an inventory accounting method that assumes the units you bought first are the units you sell first.

It's both a physical policy (rotate your stock so older units leave the warehouse before newer ones) and an accounting policy (for the books, value cost-of-goods-sold based on the oldest purchase prices).

For most consumer brands, FIFO is the default. It matches how you'd want stock to move physically — perishables expire, fashion goes out of season, packaging gets damaged. And it is permitted under most accounting standards (UK GAAP, IFRS).

A worked example

Say you bought stock of a single SKU at three different prices:

• January: 100 units at £10 each (£1,000)
• March: 100 units at £12 each (£1,200)
• May: 100 units at £14 each (£1,400)

In June, you sell 150 units. Under FIFO, the cost of goods sold for those 150 units is calculated from the oldest batches first:

• 100 units from January × £10 = £1,000
• 50 units from March × £12 = £600
• Total COGS: £1,600

Your remaining inventory is valued at:

• 50 units from March × £12 = £600
• 100 units from May × £14 = £1,400
• Closing stock value: £2,000

A second worked example — falling prices

The tax-and-margin behaviour of FIFO flips when prices fall instead of rise. Same SKU, same 150 units sold, but with a deflationary purchase pattern:

• January: 100 units at £14 each (£1,400)
• March: 100 units at £12 each (£1,200)
• May: 100 units at £10 each (£1,000)

Under FIFO, the cost of those 150 sold units uses the oldest (and now most expensive) batches:

• 100 units from January × £14 = £1,400
• 50 units from March × £12 = £600
• Total COGS: £2,000

Closing stock = 50 from March (£600) + 100 from May (£1,000) = £1,600.

In a deflationary period, FIFO produces higher COGS, lower gross profit, and lower taxable income — the opposite of the inflation case. Same method, same physical movement, different financial implications. Knowing which environment you're in matters as much as the method itself.

FIFO vs Weighted Average — same scenario, side by side

Using the rising-price example above (100 @ £10, 100 @ £12, 100 @ £14, sell 150):

Two accounting methods, one set of physical inventory, two different gross profits. The choice of method drives how reported profit responds to price changes — which in turn drives the tax bill.

Tax implications of FIFO

FIFO and the tax bill move together with prices.

• In an inflationary period. FIFO uses older (cheaper) costs in COGS, which means higher reported gross profit, which means a higher tax bill. The newer (more expensive) units stay on the balance sheet at higher value.
• In a deflationary period. FIFO uses older (more expensive) costs in COGS, which means lower reported gross profit, which means a lower tax bill. Closing stock sits at the lower current cost.
• In stable periods. Method choice barely matters. The accounting flow tracks the physical flow.

Pick the method, then live with it consistently — switching mid-stream is a disclosed accounting change with audit consequences.

Pros and cons at a glance

Pros of FIFO:

• Matches physical reality for most consumer goods
• Permitted under IFRS, UK GAAP, and US GAAP — internationally portable
• Closing stock reflects current market cost, more relevant for the balance sheet
• Easier to audit because cost layers tie back to specific purchase invoices

Cons of FIFO:

• Higher reported profit (and tax) in inflation
• Doesn't smooth out price volatility — gross margin can swing materially with input cost shifts
• Lot-tracking discipline is required; sloppy warehouse operations break the accounting link

Industry-specific notes

• Food and pharma. FIFO is mandatory in spirit if not in code — you have no choice but to ship oldest first. FEFO (First Expired First Out) is usually a stricter overlay.
• Fashion and beauty. FIFO is standard but season changes complicate it — older styles need active markdown, not passive accounting.
• Electronics. Often weighted average because component prices move continuously and lot tracking is impractical at scale.
• Industrial parts. FIFO with serial-number tracking; aged stock can quickly become obsolete as specs change.

FIFO vs FEFO vs weighted average

Three methods. Use the right one for the right context.

• FIFO — oldest stock costed first. Smoothest match to physical reality for most products. Permitted under IFRS and UK GAAP.
• FEFO (First Expired, First Out) — oldest expiry date first, regardless of receipt date. Used in food, beauty, supplements, anywhere shelf life matters. Often overlaps with FIFO but not always.
• Weighted average — every unit costed at the running average price of all stock on hand. Smooths out price volatility. Common in commodities and high-velocity stock where lot tracking isn't practical.

When FIFO physical and FIFO accounting diverge

This is the trap that catches scaling brands.

You can run FIFO accounting without rotating stock physically — and your books will still balance. But your warehouse will accumulate dead stock at the back of the rack, your oldest units will go obsolete, and at year-end you'll write down inventory that the ledger said was worth £14 a unit but is actually worth zero because nobody can sell it.

Or the opposite: you rotate stock perfectly in the warehouse but your system books COGS using weighted average. Now the gross margin number on your P&L doesn't match what's actually leaving your shelves. You can't trust either.

A clean inventory operation aligns the two: physical FIFO movement, FIFO accounting, lot or batch tracking that proves the match. Anything else creates a gap that compounds.

Why FIFO matters for planning

Cost of goods sold is the input to gross margin, which is the input to almost every commercial decision — pricing, promotions, channel mix, range planning. If your FIFO numbers are off — because you're not tracking lots, or because physical and accounting flow have diverged — every margin calculation downstream is off too. That's how brands end up "growing profitably" on the dashboard while burning cash in reality.