What is FIFO / LIFO (Inventory Costing & Flow)?
FIFO and LIFO are inventory methods that define the order in which costs (and often physical units) are assumed to be consumed: oldest-first or newest-first.
Definition
FIFO (First-In, First-Out) assumes the oldest inventory is sold or used first, while LIFO (Last-In, First-Out) assumes the newest is consumed first. As cost-flow assumptions they determine which costs land in cost of goods sold versus ending inventory, which affects reported profit and inventory value, especially when prices change. FIFO is also a common physical-handling rule to reduce spoilage and obsolescence by moving older stock first. LIFO is permitted under US GAAP but is not allowed under IFRS, so its use is geographically constrained.
How FIFO / LIFO Works in ERP
ERP costing modules apply the chosen method to value inventory layers and calculate cost of goods sold as transactions post, maintaining cost layers for FIFO or LIFO accounting. Physically, warehouse rules can enforce FIFO (or FEFO, first-expiry-first-out) picking by directing workers to the oldest lot or earliest expiry date. The accounting cost-flow method and the physical picking rule are configured separately and need not be identical.
ERP Vendors with Strong FIFO / LIFO
Oracle NetSuite
The original cloud ERP — built for fast-growing companies
Acumatica
Resource-based cloud ERP — unlimited users, pay by usage
SAP S/4HANA Private Cloud
Fully customisable managed-cloud ERP for complex enterprises
Epicor Prophet 21
Distribution-focused ERP with deep wholesale features
Frequently Asked Questions
Is FIFO a costing method or a physical picking rule?
It can be both, and the two are configured independently. As a cost-flow assumption, FIFO assigns the oldest costs to COGS for accounting. As a physical rule, FIFO directs the warehouse to pick the oldest stock first to avoid obsolescence. A company can run FIFO physically while using a different costing method, or vice versa.
Why is LIFO not allowed under IFRS?
IFRS prohibits LIFO because it can produce an outdated balance-sheet inventory value and can be used to distort reported income, reducing comparability. US GAAP still permits LIFO, often for tax reasons in inflationary periods. Companies reporting under IFRS therefore use FIFO or weighted-average costing instead.