Inventory valuation method is one of the most consequential accounting choices in ERP — it affects profit calculation, balance sheet value, and tax liability simultaneously.
FIFO: First In, First Out
FIFO assumes the oldest stock is sold first. In a period of rising costs, FIFO produces higher gross profit and higher closing stock value. It most closely matches actual physical flow for perishable goods.
AVCO: Weighted Average Cost
AVCO recalculates the average cost of all units every time new stock arrives. This smooths out price fluctuations and is typically the easiest valuation method to implement and explain.
Standard Costing in Manufacturing
Manufacturing companies often use standard costs — predetermined costs set at the beginning of a period. Actual costs are compared to standard, with variances recorded separately. This simplifies costing but requires discipline in standard-setting.
Choosing the Right Method for Your Business
The choice depends on your industry, price volatility, and regulatory requirements. ERP implements any of these methods, but the decision should be made with your auditor and tax advisor — changing methods mid-stream requires FBR approval.
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