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: Standard Average FIFO by Lot / by Serial (Real Cost aka Actual Cost) - on the Product itself What are the advantages and disadvantages of each? When would a company choose one over another? Which is the most accurate?

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What are the pros and cons of each of the different Inventory Costing methods? the most accurate?

fifo inventory cost average actual

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Community Question

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:

Standard
Average
FIFO
by Lot / by Serial (Real Cost aka Actual Cost) - on the Product itself

What are the advantages and disadvantages of each? When would a company choose one over another?

Which is the most accurate?

Ray Carnes (ray)

Najlepsza odpowiedź

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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