What are the FIFO, LIFO, FEFO and Average Methods? This is an explanation of the four methods

FIFO, LIFO, FEFO Methods – Talking about business, maybe one of the things that is in your mind is an advantage. Yes, it is indeed one of the important components in a business. However, in order to make a profit, the availability of goods is also required.

Therefore, business in any field requires a fairly good inventory system. Currently there are at least four systems for recording the availability of goods or stock of goods. The four inventory recording systems are the FIFO, LIFO, FEFO and Average methods.

If Sinaumed’s is already involved in the business world, maybe FIFO, LIFO, FEFO and Average are familiar. However, there are some people who do not really understand some of these stock recording methods.

You don’t need to worry about that, because this article will provide an explanation of FIFO, LIFO, FEFO and Average. Good for those of you who have been in the business world for a long time or are just about to start.

It’s really mandatory to read the explanation in this article regarding the FIFO, LIFO, FEFO and Average methods that are applied to the inventory recording system.

Understanding the FIFO, LIFO, FEFO and Average methods

The previous explanation has mentioned a little about the FIFO, LIFO, FEFO and Average methods. These four methods are so important in recording inventory in the business world. Of course the FIFO, LIFO, FEFO and Average methods have different meanings.

From this understanding, it is hoped that we can learn or know in general terms what the FIFO, LIFO, FEFO and Average methods actually are in the business world. Or should the business world have to use the FIFO, LIFO, FEFO and Average methods for the process of recording inventory.

So maybe at first many were confused and didn’t really know the meaning of the FIFO, LIFO, FEFO and Average methods. Therefore, we start from understanding the meaning of the FIFO, LIFO, FEFO and Average methods.

Definition of the FIFO Method

First, there is the FIFO method, which is included in one way of recording inventory. FIFO also stands for First In First Out . Just as the FIFO method stands for, it is a system that makes an item that enters the first order must come out first as well.

Simply put, the FIFO method is a system that requires that the first goods in must also be the first goods out. In the business world, the FIFO method is widely used in retail businesses.

An example is businesses in the F&B or Food and Beverage sector such as food shops, cakes and even minimarkets. Of course, you are also aware that every product sold in these places has a short expiration date. Therefore, these items must be sold quickly.

LIFO Method Definition

Next there is the LIFO method which is also included in one of the methods of recording goods. The LIFO method is arguably the opposite of the FIFO method. LIFO stands for Last In First Out.

Where this method will implement a system of selling goods that enter the last order will be sold in the very first order. Then for goods that have existed since the first will be sold at some time later. You could say the LIFO method is easier in the process of structuring goods.

Interestingly, the LIFO method also provides its own advantages for business owners. This is because the LIFO method can save the process of spending taxes when inflation occurs. It should be noted that when inflation occurs, the profits will decrease but will not affect the profits from the operations carried out.

An example is a business actor in the field of selling clothes. The process of selling clothes will be carried out as an ongoing trend. This means that even though the clothes that are in stock are in the last order. Still will be sold because market demand is rising.

This will also increase the profits received by business actors selling these clothes.

Then what about stock items that are not trending? So the action taken is to keep back in the warehouse and resell it when it’s a trend.

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Definition of the FEFO Method

The FEFO method is also a method of recording goods. FEFO itself is an acronym for First Expired First Out. From this abbreviation it can have a broader meaning, namely goods or products that have the fastest expiration date will be sold first.

In the FEFO method, business owners don’t need to think about the order in which goods are to be sold. However, business actors will pay attention to the expiration date of the product.

So even though there are new products coming in, the expiration date is near. Then the product will be sold first. The existence of the FEFO method is claimed to be able to minimize losses from ongoing business.

As an example is the sales system in pharmacies. Pharmacy business actors will sell drug products according to the expiration date. Drug products with the closest expiry date will be sold first.

One of the ways used to apply the FEFO method to the pharmacy business is to place drug products that have the closest expiry date in the front of the window. The hope is that potential buyers will know about these drug products.

Average method

Compared to the three methods above, the Average method is quite complicated. The application of the Average method is to obtain the results of calculating unit costs in the inventory section.

Then to get these results is done by dividing all the units in the warehouse by the availability of units to be sold. Later the results obtained are an average cost of the product to be sold.

Now that’s an explanation related to the meaning of the FIFO, LIFO, FEFO and Average methods. The four methods have different meanings. In addition, each method also has its own advantages and functions. Then what method do you apply in your personal business?

The advantages of the FIFO, LIFO, FEFO and Average Methods

Now, after knowing the meaning of the FIFO, LIFO, FEFO and Average methods. Of course, it is incomplete if you only know what the FIFO, LIFO, FEFO and Average methods mean. You also need to know the advantages of some of these methods.

Both the FIFO, LIFO, FEFO and Average methods always have their respective advantages. Of course, by understanding the advantages of each inventory method, you will also better understand the best inventory method to apply to the type of business that is being run.

So that you understand more about the advantages of the FIFO, LIFO, FEFO and Average methods. The following is a complete explanation regarding this matter.

The advantages of the FIFO method

The first will start from the advantages of the FIFO method. Even if only a few points of excess. However, the explanation below will be quite helpful in knowing in outline what the FIFO method can provide when applied to the business side.

  1. The process of recording the goods report will be the same as the data on the goods in the warehouse.
  2. The FIFO method is also able to make HPP or cost of goods sold relatively low. However, in terms of gross profit, it will get quite high results.
  3. The FIFO method is also more profitable, logical and also claimed to be very reliable.
  4. The FIFO method is able to suppress the decline in the quality of goods.
  5. The process of applying the FIFO method is somewhat easier to understand.
  6. Financial reports with the application of the FIFO method will also minimize manipulation.

Advantages of the LIFO Method

After understanding what are the advantages of the FIFO method. So at this point we will proceed to explaining the advantages of applying the LIFO method to stock items. So that you will also understand more quickly, here is an explanation of the advantages of the LIFO method.

  1. The process of arranging goods with the LIFO method system will be easier.
  2. Spending in terms of taxes will be more controlled and also economical.
  3. The possibility of getting a profit could be greater. This is because the LIFO method takes advantage of what is trending at the same time.
  4. The process of comparing the amount of costs or costs with the income generated is somewhat easier.
  5. Even though there is a possibility of inflation, operating profit will not affect this condition.

The advantages of the FEFO method

This third point will provide an explanation of the advantages of the FEFO method. The FEFO method is also often applied in the business sector. Just like the two previous points, the FEFO method also has several advantages.

  1. The FEFO method is claimed to reduce the possibility of losses to the company.
  2. The existence of the FEFO method is also able to reduce the occurrence of storage of product stock that has passed its expiration date.’

Advantages of the Average Method

Finally, there is the Average method which also has its advantages. Although not as much as the advantages of the previous method. However, the Average method can also help the continuity of business processes. Below are some explanations related to the advantages of the Average method.

  1. The existence of the Average method will also make it easier to get the value of the goods inside without having to worry about the entry time.
  2. The company is able to provide goods or products in the warehouse without having to think about which one will enter first.
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Those are some of the advantages that some of these methods have. After knowing some of the advantages of the FIFO, LIFO, FEFO and Average methods, of course, it will also make it easier for you to choose the method of recording stock of goods in the business that you are in.

 

Disadvantages of FIFO, LIFO, FEFO and Average methods

Although the FIFO, LIFO, FEFO and Average methods have their respective advantages. But still a system also has drawbacks. So maybe some of you don’t really know what are the drawbacks of the FIFO, LIFO, FEFO and Average methods.

The explanation below can help you to provide an explanation regarding some of the shortcomings of the FIFO, LIFO, FEFO and Average methods.

Disadvantages of the FIFO Method

The first explanation will start from the shortcomings of the FIFO method. Here is the explanation.

  1. The application of the FIFO method allows the payment of the tax burden by companies to the government to be somewhat higher.
  2. The FIFO method is indeed able to provide its own profit. However, the calculation and profit income are somewhat less accurate.
  3. The difference between the capital used for production and the profit generated is quite large.

Disadvantages of the LIFO Method

Next is about the disadvantages of the LIFO method. The following describes the disadvantages of the LIFO method.

  1. The process of recording goods is somewhat more complicated. This is because the LIFO method is more contradictory to the flow of goods in and out of storage.
  2. The LIFO method is somewhat more complicated, this makes the bookkeeping costs carried out higher.
  3. Although able to provide profit on sales. However, sales profit from the application of the LIFO method is relatively low.

Disadvantages of the FEFO Method

Next are the disadvantages of the FEFO method. Similar to the two previous methods, the FEFO method also has its own drawbacks. Below are some of the disadvantages of the FEFO method.

  1. It takes more time because every day you have to look for products with the fastest expiration dates among the hundreds or thousands of products that will be sold.
  2. The level of accuracy is higher because the items sold are more than tens.
  3. Requires more than one worker to apply the FEFO method to recording inventory.

Disadvantages of the Average Method

The last is the weakness of the Average method. Below is an explanation of the drawbacks of the Average method.

  1. Although it can generate profits from the sales process. However, the application of the Average method is only able to generate profits with small or few conditions.
  2. Compared to the previous three methods, the Average method is the most complicated at its level.

So those are some of the drawbacks of the FIFO, LIFO, FEFO and Average methods. Although it has drawbacks in each method. But still, when viewed from the advantages provided. The FIFO, LIFO, FEFO and Average methods can still be used for inventory records.

 

Examples of the Application of the FIFO, LIFO, FEFO and Average Methods

After knowing the meaning, advantages and disadvantages of the FIFO, LIFO, FEFO and Average methods. It’s still not enough if you don’t know examples of applying the FIFO, LIFO, FEFO and Average methods in a business sector.

Because not all business fields are suitable for using inventory recording systems such as the FIFO, LIFO, FEFO and Average methods. So that you are not even more curious about examples of applying the FIFO, LIFO, FEFO and Average methods. The following is an explanation of this.

Example of the Application of the FIFO Method

Food companies will usually implement a goods recording system using the FIFO method. An example is the sale of bread, of course you also know that bakery products have a very fast expiration date.

Example of LIFO Method Application

Most applications of the LIFO method are in the clothing sales business. However, some in the business of selling electronic goods and books also apply the LIFO method of inventory recording.

Example of the Application of the FEFO Method

Companies in the pharmaceutical sector are an example of the application of the FEFO method as a goods recording system. Then companies that sell food and beverages will also implement a goods recording system using the FEFO method.

Example of the Application of the Average Method

Then for an example of applying the Average method as a goods recording system is in a business sector that does not have an expiration date on its products. Some of them are companies that sell furniture, stationery, building materials and so on.

Those are some explanations about the FIFO, LIFO, FEFO and Average methods. The explanation above can help you choose the method of recording the most suitable stock of goods for the field of business that is being carried out.