Odoo is the world's easiest all-in-one management software.
It includes hundreds of business apps:
I have seen that a costing method for calculating and recording inventory costs is defined on the product category in Odoo.
There are several options:
What are the advantages and disadvantages of each? When would a company choose one over another?
Which is the most accurate?
Note: choices about Inventory valuation methods should not be made without consulting with experts in Accounting and Taxation practices in your Country. Some countries mandate the use of specific methods in some scenarios (in the USA, the IRS mandates FIFO if you have any inventory stored outside the USA) and changing the method used often requires notification to and/or approval from your tax authority (in the USA, the IRS has specific procedures and forms to submit). You may or may not have to choose the same method for all of your Inventory.
Accuracy depends on various the circumstances and goals of the business, industry practices,
and regulatory requirements. Each method has strengths and weaknesses, and what
might be the most accurate for one business may not be the most accurate for
another business. There isn't a universally "most accurate" method.
|
Method |
Best For |
Pros |
Cons |
|
Standard Price
Manual - a user defined and user managed fixed cost
All units have the same cost |
Stable product prices Consistent manufacturing processes Simple cost accounting and budgeting |
Good for monitoring material / labor / overhead variances |
Differences between actual cost and standard cost could over or understand inventory value May not reflect market prices
|
|
Average Cost
Automatic - calculates a weighted average All units have the same cost |
Relatively stable product prices High-volume, homogeneous products Very common |
Smooths out fluctuations in purchase prices
|
Does not track specific unit costs May not reflect market prices
|
|
First in First Out (FIFO)
Automatic – calculates oldest to newest costs |
Perishable products Prices that are increasing
|
More accurate during inflationary periods Accurately measures the cost of replacing inventory |
May lead to higher taxable income during inflationary periods * |
|
By Lot/Serial number
Automatic – calculates the real costs
Also called specific identification |
Regulated industries High value products
|
Precise costs
|
Requires lots / serials to be entered on all Transfers |
* since you are selling your older, cheaper inventory your cogs will be lower and your profits higher than if you had used another method such as average.
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