First in First Out

  • Posted On: February 4, 2025

Efficient inventory management plays a crucial role in warehouse and logistics operations, and understanding the first in first out meaning can help businesses optimize their stock handling.

So, how exactly does the “first in, first out” (FIFO) method keep inventory under control?

Let’s break it down step by step.

What Is the First in First Out (FIFO) Method? 

The first in first out (FIFO) method is an inventory management approach where the oldest stock (first in) is sold or used first (first out). 

By understanding the first in first out meaning, you can ensure that items don’t sit on shelves for too long, reducing the risk of spoilage or obsolescence. 

How Does the First in First Out Stock Method Work? 

With first in first out stock, businesses handle inventory in a way that mirrors natural product cycles.  

It’s particularly useful for items with expiration dates, such as food, medicine, or any perishable goods. Here’s how it works: 

  1. Products are arranged in the order they are received. 
  1. When fulfilling orders, older products are used before newer ones. 
  1. The stock is continuously rotated to maintain a fresh inventory cycle. 

This method benefits businesses by keeping goods from going to waste, improving customer satisfaction with fresh products. 

What Is the FIFO Method Formula? 

The FIFO method formula is often used to calculate the cost of goods sold (COGS) for accounting purposes. The formula is: 

COGS = Cost of Oldest Inventory × Quantity Sold 

For example, if your first batch of products cost $5 per unit and you sell 100 units, the COGS would be: 

COGS = $5 × 100 = $500 

This method helps businesses accurately track profitability and comply with accounting standards. 

Benefits of the FIFO Inventory Method 

Here are some key advantages of using the FIFO inventory method: 

1. Reduces Waste: 

By prioritizing the sale or use of older stock, businesses prevent items from expiring or becoming obsolete.  

It is particularly crucial for industries that handle perishable goods like food and pharmaceuticals.  

Without FIFO, unsold older products can go to waste, leading to unnecessary losses.  

2. Accurate Cost Tracking: 

The FIFO method aligns accounting records with real-time market conditions by using older costs first when calculating the cost of goods sold (COGS).  

By using actual historical costs, financial statements become more transparent and reliable, which can also simplify audits and compliance with tax regulations. 

3. Better Customer Satisfaction 

By ensuring customers receive fresher products, businesses can build stronger relationships and a better reputation.  

In industries like retail or food services, freshness can be a critical factor in customer experience.  

Simplify Inventory Management with Teamship 

At Teamship, we understand the importance of effective inventory management for warehouse operations.  

Our platform is designed to streamline inventory control by offering real-time stock visibility and automation. 

This helps brands and warehouses effortlessly apply strategies like FIFO to minimize waste and maximize efficiency. 

Reach out to us today for more information! 

Frequently Asked Questions 

1. Can the FIFO method be used for non-perishable goods? 

Yes! While commonly used for perishable goods, FIFO is also effective for non-perishables to prevent long-term storage costs and product obsolescence. 

2. How does FIFO differ from other inventory methods like LIFO? 

Unlike FIFO, the Last In First Out (LIFO) method prioritizes selling the newest stock first. FIFO typically offers better financial clarity, especially during periods of inflation. 

3. Does using FIFO require specific software? 

Although you can manage FIFO manually, using warehouse management software like Teamship automates stock tracking, ensuring smooth operations and accuracy. 

Share This Article