FIFO & Moving Average Valuation Methods

ERPNext values inventory using a perpetual inventory system, where every stock transaction updates both the quantity and value of inventory in real time. The Valuation Method determines how the cost of inventory issued from stock is calculated and directly affects inventory valuation and the Cost of Goods Sold (COGS).

ERPNext supports three valuation methods:

FIFO (First In, First Out)
Moving Average
Standard Cost (covered separately)

This guide focuses on FIFO and Moving Average, explaining how each method works, how inventory value is calculated, and when each method is most suitable.

Where to Configure

The Valuation Method can be configured for an individual Item, inherited from the Company, or set globally in Stock Settings. Item-level settings take the highest priority.

1. FIFO (First In, First Out)

FIFO assumes that the oldest inventory is consumed first. Every stock receipt creates a separate inventory layer with its own quantity and valuation rate. Whenever stock is issued, ERPNext consumes inventory beginning with the oldest available layer.

1.1 Example

Transaction	Inventory Layers	Inventory Value
Receive 10 units @ 100	10 @ 100	1,000
Receive 10 units @ 120	10 @ 100, 10 @ 120	2,200
Issue 15 units	5 @ 120	600

Example

When 15 units are issued, ERPNext consumes the oldest inventory first: 10 units @ 100 and 5 units @ 120. The total inventory cost becomes 1,600, while the remaining inventory consists of 5 units valued at 120 each.

1.2 Advantages

Reflects the actual purchase cost of inventory consumed.
Provides accurate inventory valuation for remaining stock.
Well suited for products with expiry dates or batch rotation.
Widely accepted for accounting and statutory reporting.

1.3 Limitations

Historical changes require inventory reposting.
Can increase processing time for items with large transaction histories.
COGS can fluctuate significantly when purchase prices change.

2. Moving Average

Moving Average maintains a single average valuation rate for each item. Every new stock receipt recalculates the average cost, while stock issues always use the current average valuation rate.

2.1 Average Cost Formula

New Average Cost

(Existing Quantity × Existing Average Rate + Incoming Quantity × Incoming Rate)

(Total Quantity After Receipt)

2.2 Example

Transaction	Quantity	Average Rate	Inventory Value
Receive 10 units @ 100	10	100	1,000
Receive 10 units @ 120	20	110	2,200
Issue 15 units	5	110	550

Example

After receiving inventory at two different prices, ERPNext calculates an average valuation rate of 110. Every unit issued afterward uses this average cost until another receipt changes the average.

2.3 Advantages

Smooths fluctuations in purchase prices.
Simple inventory valuation with one average cost.
Well suited for high-volume and homogeneous inventory.
Produces more stable profit margins.

2.4 Limitations

Does not preserve the original purchase cost of individual inventory lots.
Historical corrections require inventory reposting.
The average valuation rate may lag behind current market prices.

3. FIFO vs Moving Average

Feature	FIFO	Moving Average
Inventory Cost	Oldest inventory layers	Current average cost
Tracks actual purchase cost	Yes	No
Ending Inventory	Recent purchase prices	Average valuation rate
Inventory Records	Multiple inventory layers	Single average rate
Best For	Perishable and high-value inventory	Fast-moving and homogeneous inventory

4. Backdated Transactions and Reposting

Both FIFO and Moving Average depend on historical inventory transactions. If a backdated stock transaction is created, cancelled, amended, or updated through a Landed Cost Voucher, ERPNext recalculates all subsequent stock ledger entries for the affected item.

Important

Backdated inventory changes trigger a Repost Item Valuation process that recalculates inventory quantities, valuation rates, stock values, and General Ledger entries for all future transactions of the affected item.

5. Choosing the Right Valuation Method

Business Scenario	Recommended Method
Perishable or expiry-controlled inventory	FIFO
High-value or lot-traceable items	FIFO
Bulk commodities or raw materials	Moving Average
Fast-moving inventory	Moving Average
Stable and predictable costing	Moving Average

6. Best Practices

Select the valuation method before inventory transactions begin.
Use consistent valuation methods for similar categories of items.
Process historical corrections during low-activity periods since they trigger reposting.
Create Landed Cost Vouchers promptly to avoid large historical recalculations.
Regularly reconcile inventory reports with General Ledger balances.

Summary

FIFO values inventory by consuming the oldest available stock first, making it ideal for perishable, regulated, and high-value inventory. Moving Average uses a continuously updated average cost, providing smoother inventory valuation and simpler cost management for high-volume items. Both methods support perpetual inventory accounting and automatically update inventory valuation and accounting records, but historical changes require ERPNext to recalculate subsequent stock transactions through inventory reposting.

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