How to set inFlow’s costing method (Moving average, FIFO, LIFO etc.)
Interested in tracking product costs in inFlow? inFlow Cloud calculates profit based on the cost of your items, so it’s important to choose how you want inFlow to calculate cost before you start selling. The following Costing Methods are available:
To choose your costing method:
- Go to the Main Menu > Options > Settings.
- Select which costing method you’d like to use
- Click Save and Close, this may take some time if you’ve already been using a different costing method.
If you’re wondering which costing method you should choose for your business, that depends. Here’s how the calculation works for each costing method.
Moving Average Cost
Moving Average cost re-calculates the average cost of each inventory item in stock after every purchase. This calculation would take the total cost of the items purchased divided by the number of items in stock. Here’s a calculation example:
Let’s start with 10 quantity of Product A, and the unit cost is $50.
A sales order is then raised for 3 of Product A. You are left with 7 quantity.
Now you’ve reordered 5 more of Product A, but the vendor price has changed to $55 (or shipping is added this time — anything that will amount to the cost being different than the original $50).
Your current cost would be calculated using the formula: Total cost / Total quantity
Old cost ($50 x 7) + New cost ($55 x 5) ÷ 12 (total quantity) = $52.08333
This calculation can be viewed via the moving average cost history.
Manual cost does not change until you update it manually in the product record, and is unaffected by purchase orders at all. Use this method if you prefer to calculate your product cost manually (outside of inFlow) and if your cost doesn’t fluctuate too much. You would have to review your costs each year (or term) as your vendor prices may rise, since purchase orders don’t affect this cost unlike the rest of the costing methods.
As an example, if you’ve calculated the cost of “Product A” to be $50, simply go to the record and set the cost as $50. That’s it!
Services and Non-Stocked type items always use Manual cost, no matter what you’ve set as your system-wide costing method.
FIFO (First-in, First-out)
This method of costing means that the oldest inventory items (first-in) will be sold first (first-out). Therefore your oldest purchasing costs will be used to calculate your profit, at the time of that sale. Here’s the example again using Product A.
We’ll start once again with 10 quantity of Product A, and the unit cost is $50.
We’ll sell 3 of this product to a customer, and the cost of goods sold would be $50 x 3 = $150.
At some point let’s say you’ll need to purchase more, and you go ahead and purchase 5 more for $55.
If you check your product record you might see the cost as $50. This is correct as you’ve still got old stock with that cost. Your first sales of the initial 10 quantity will use the inital cost of $50, until you hit the new stock costed at $55.
Note that because of the layered costing within a single product, inFlow cannot show each cost layer in the reports. It can only show an average.
LIFO (Last-in, First-out)
LIFO is a similar layered costing method to FIFO, except it uses the newest stock / newest cost in your sales. Using the same purchasing example above:
We’ll be starting once again with 10 quantity of Product A, and the unit cost is $50.
Then, sell 3 of this product to a customer (cost of goods sold = $50 each).
Finally, raise a new purchase order for 5 more at $55 each. You’ve now got 12 quantity total of Product A.
Any new sales order past this point will use the cost of $55, since that’s the cost of your newest stock. After the first 5 have been sold, the remainder 7 will use the cost of $50 (old cost).
Similar to the FIFO costing method, the reports can only show an average cost.