FIFO and Moving Average calculation difference

FIFO and Moving Average calculation difference

Valuation The cost of making a product accessible for sale, including freight, labor, the cost of raw materials, etc., is factored into the rate of an item.

Based on the valuation technique chosen for the specific item, ERPNext calculates the valuation rate. Moving Average or FIFO can be chosen as the value method for an item.

To understand how it affects your stock, take a look at the following example:

How to Determine the Valuation Rate at Sale Time:

As per FIFO:

Due to FIFO, we must use quantities from the earliest transactions in order to make sales. As a result, in order to make a sale of 15 quantities, we must use 10 quantities from the first transaction and 5 quantities from the second.

(10 * 100) plus (5 * 120) equals 1600, leaving us with 15 quantities at a cost of 120, or 1800.

As per Moving Average:

When using the Moving Average approach, each time an item is acquired, its value is reassessed. For this, the value of the current inventory is increased by the cost of the recently purchased goods, and the value is then divided by the total number of available items.

((10 * 100) + (20 * 120)) / 30 = 113.33

We will just multiply the average value we just received by 15 quantities to make the deal. We have 15 qty in stock, which works out to be 15 * 113.33 = 1700.

If you check, the stock value is different even though the quantity is the same, yet both only add up to 3400 in total.