Inventory Costing Methods

In this article, you'll learn how the cost of an item is calculated based on the costing method you've selected Written by Stanislava Berberova
Updated over a week ago

Costing methods will determine what cost will be assigned to an item when you sell it in order to calculate profit margins.

Let's start by looking at an example. Imagine you've bought 5 units of a product for \$10.00 each from your supplier. Then you've bought 3 more but, this time, for \$12.00 each.

Here's how the cost of the product will be calculated with each one of the three costing methods available in QuoteMachine:

## FIFO (first in first out)

With this method, the first 5 units you sell will be assigned a cost of \$10.00 each. Then, the 3 remaining units will be assigned a cost of \$12.00. In other words, the system considers the cost of the oldest stock (first in) that entered your inventory when you sell.

## LIFO (last in first out)

With this method, the first 3 units you sell will be assigned a cost of \$12.00 each. Then the 5 remaining units will be assigned a cost of \$10.00. In other words, the system considers the cost of the newest stock (last in) that entered your inventory when you sell.

## WAC (weighted average cost)

With this method, an average cost will be calculated by dividing the total cost of all units in stock by the total number of units. Following our example the calculation would look like this: (5units x \$10.00 + 3units x \$12.00) / 8units = \$10.75