FIFO

First In First Out (FIFO) 

FIFO is an acronym which commonly stands for First In, First Out. 

This is an inventory valuation and management method that assumes the oldest items are sold or consumed first. This means that the first items purchased or produced are the first to be sold or used. It is a commonly used inventory management tool used in pharmaceutical industry to manage Raw and Packing Material. In this Blog we shall under the process, pros and cons for this inventory management tool.

How does FIFO work?  

1. Purchases: When a business purchases or produces inventory, it records the cost of those items.

2. Sales: When the company sells an item, it assumes that the item sold is the oldest in stock. The cost of this oldest item is then used to calculate cost of goods sold (COGS).

3. Inventory valuation: The remaining inventory is valued based on the cost of the most recent purchases.

Why use the FIFO method? 

1. Accurate valuation of inventory: In times of rising prices, the FIFO method can provide a more accurate valuation of ending inventory because it reflects the cost of the most recent purchases.

2. Tax benefits: In some cases, the FIFO method can result in lower taxable income because the cost of goods sold is based on older, potentially less expensive items.

3. Simpler accounting: The FIFO method is generally easier to understand and implement than other inventory valuation methods, such as the last-in, first-out (LIFO) method.

When is FIFO not appropriate? 

1. Falling prices: If prices fall, FIFO can result in higher taxable income because the cost of goods sold is based on the oldest and potentially more expensive items.

2. Perishable products: For perishable products, the FIFO method may not be the most practical method, since older items are more likely to spoil.

A visual representation of FIFO 

Imagine a line of people waiting to buy tickets to a concert. 

1. First in line: The person who arrives first is the first to buy a ticket. 

2. First: When tickets are sold, the person at the front of the line is the first to leave with their ticket. This is basically the concept of FIFO. 

The first items to enter a system (in this case, the queue) are the first items to exit (buy a ticket). 

Key relationships: 

1. Entry order: The order in which items enter the system determines their exit order.  

2. No preferential treatment: All items are treated equally, regardless of value or importance. 

3. Common applications: FIFO is used in a variety of industries, including inventory management, manufacturing, and queuing systems.

Applications of FIFO 

The FIFO (First In, First Out) principle is widely used in various fields. Here are some common applications: 

1. Inventory management 

* Retail: Stores often use FIFO to ensure that the oldest products are sold first, preventing them from deteriorating or becoming obsolete. 

* Manufacturing: In industries such as food or pharmaceutical processing, FIFO helps maintain product quality and safety by prioritizing the use of old materials. accounting 

* Cost of goods sold: FIFO is used to calculate the cost of goods sold, which affects the profitability of a company. * Inventory valuation: FIFO provides a method of valuing inventory on the balance sheet. Systems later 

* Call centers: Calls are usually processed in the order they are received (FIFO), ensuring fair treatment for all customers. 

* Restaurants: FIFO is often used for seating, with customers seated in the order they arrive. 

2. Production process 

* Assembly Lines: Components are often processed in the order they arrive on the line, ensuring an efficient production flow. 

* Manufacturing facilities: raw materials are processed in the order they are received, minimizing waste and maximizing productivity. Other applications 

* Data processing: FIFO is used in data structures such as queues and stacks. 

*Calculation: FIFO is a fundamental principle in algorithms and data structures.