The methods in practice
- FIFO assumes the oldest units sell first. In a rising-cost environment this reports higher profit and higher tax.
- LIFO assumes the newest sell first, reporting lower profit when costs rise. It is permitted in the US but not under IFRS.
- Weighted average smooths the cost across units, which suits businesses where units are genuinely interchangeable.
Why it matters beyond tax
Gross margin is one of the most scrutinised figures in a product business, and the method materially changes it. Comparing your margin to a competitor using a different method is not a like-for-like comparison.
Landed cost is the bigger issue
Most businesses lose more accuracy by excluding freight, duty and fulfilment from unit cost than by choosing the wrong method. A unit that costs 11 dollars landed and is recorded at 8 produces a margin that does not exist.
Changing method
A change in inventory method is an accounting method change with filing requirements, not a decision you make in the software. Choose deliberately at the outset.
TallyWise provides this as part of our ecommerce accounting services. Book a call to talk through your situation.
