Correct inventory account requires using a consistent costing method. This is the logic by which Cost of Goods Sold (COGS) are determined when inventory is used, sold, or discarded.
Different kinds of inventory are better suited for a particular costing method, so we’ve written a breakdown to help you determine which to use. Ambrook supports the two most common costing methods, and lets you select different costing methods for different items on your books.
First-in, First-out (FIFO)
FIFO (First-In, First-Out) is a common inventory costing method—and the default in systems like QuickBooks Online. Under FIFO, your oldest inventory purchases are always used first to determine Cost of Goods Sold (COGS).
This means that if your older inventory was purchased at higher prices than newer inventory, your COGS will be higher until you’ve sold through those older batches.
In addition to being simple to calculate, FIFO has several practical advantages:
May better reflect real-world inventory flow: For products with expiration dates or that are perishable, FIFO mirrors how inventory actually moves through a business—using the oldest stock first.
Provides a balance sheet closer to market value: Because FIFO values remaining inventory based on newer purchases, your inventory accounts may better reflect current market conditions.
FIFO is an appropriate costing method for most types of inventory. However, consider the following when deciding whether FIFO is a good fit for a particular item:
You should be able to reasonably identify the batch or age of an inventory item when it’s used or sold.
FIFO often results in lower expenses and higher gross profit during periods of inflation, since older, lower-cost inventory is recognized first.
FIFO works best for items with relatively fast turnover (typically sold within 90–120 days), since cost differences over that short period tend to be small.
Weighted Average Cost (WAC)
Weighted Average Costing (WAC) means that for any inventory usage, the system calculates the Cost of Goods Sold (COGS) using the average cost of all inventory on hand at that time.
This method is considered simple and efficient because it doesn’t require tracking how old specific inventory batches are when they’re sold or used.
Using WAC has a couple of notable benefits for your financial reporting:
Smoother gross profits: Because costs are averaged, there are no sharp jumps in COGS when moving from one batch to another.
More stable income reporting: WAC helps produce steadier financial results, even when market prices fluctuate significantly. This can make net taxable income more predictable in periods of volatility.
WAC is especially useful for inventory that’s commodity-like, both in agriculture and other industries. Typical characteristics of items well-suited to WAC include:
Inventory that’s co-mingled or indistinguishable when used (e.g. grain in a bin, bales of hay, or bulk feed).
Frequent price changes—where costs can rise and fall often.
Frequent movement or partial usage of inventory across locations or batches.
In Conclusion
When setting up your inventory, it’s important to consider both how you actually track inventory day to day in your operation, and also how you’d like your financial statements to be prepared. We recommend getting in touch with your tax accountant if you have questions about what is best for your business or filing method.
Many businesses on Ambrook need to use both FIFO and WAC across different items. Some typical examples for each method are outlined below - but know that many item types can be flexible. The thing that is most important is how you want costs to flow through the books.
First-in, First-out (FIFO) | Weighted Average Cost (WAC) |
Perishable products e.g. lettuce | Commodity crops |
Input supplies e.g. fertilizer | Young livestock |
High-turnover items | Blended liquids |
Reach out to our support team if you have any questions!