FIFO, also known as “First In, First Out”, inventory method is when the oldest inventory items, or those that were first received into inventory (or otherwise brought into the inventory by means of a positive transaction) are the first items to be charged out. Each positive transaction (such as receipts, transfer in, etc.) is recorded by transaction date to the part record as it comes in to inventory.
The following example shows the purchase, receipt, charge (or issue to a WO), and additional purchases, and receipts of the parts and how the system maintains the cost associated to the inventory item as it was purchased at.
Below you will see an item that currently has 0 on hand with a unit cost of $5.00.
We then create a purchase order (PO_1), to purchase 3 parts at $6.38. and receive the PO.
A second PO (PO_2) is issued for the same part, but in this instance, the parts cost $4.25. You will see the Purchase in the Part History, but the parts have not been received as of yet.
A part is then charged to a Work Order at the cost of $6.38, what is currently reflected as the unit cost, as well as what the cost was when that particular part was received.
After this part is charged, the next 3 parts arrive from PO_2, and are received in to the system. By receiving these parts, you will notice that the unit cost on the main inventory item record now reflects the cost of $4.25, the price at which the next 3 parts were purchased at.
However, there are still 2 parts in inventory that we received in at $6.38. The system will maintain this cost association to the next 2 parts that are charged to a Work Order, even though the system now reflects the most recent cost. The next two images show this effect.
The next occurrence in the system is a charge of this inventory item to a Work Order. Since the system is set to respect FIFO, the part charge will reflect the true cost of the next inventory item as it was received in.
Here you will see a series of charges of the same inventory item, and the cost is reflective of what each part was purchased at. Notice the first 3 parts are charged at $6.38 even though there is a receipt of parts before they are issued to the Work Order.
NOTE: The charges window will show the current cost from the Inventory Record, but once the charge is processed, it will revert to the cost that is associated to that individual part.
As you see in the part history, there is another purchase of this particular inventory item, before all parts are charged, however, the cost per part is in the order in which it was received. There is a 3rd PO (PO_3) that purchased parts at $7.50, but that cost is not associated until all parts received before them have been processed out at their respective cost.
SUMMARY
- Part Purchased and Received on PO_1 at $6.38.
- Part Purchased on PO_2 at $4.25.
- Part Issued (Charged) to WO at $6.38.
- 3 Parts received at $4.25 from PO_2.
- 2 Separate charges of item to WO after receipt of the 3 parts for PO_2 that cost $4.25, however, the cost associated with the 2 charges remains at $6.38.
- A purchase of 3 more parts at $7.50 on PO_3
- This now sets the cost of the part at $7.50 on the main record, however, there are still the 3 parts in inventory with a cost of $4.25 associated with them.
- 3 Separate charges of the item to a work order are then processed, and the cost of $4.25 is help to these charges for FIFO purposes.
- Parts charge after the 3 parts with the cost of $4.25 associated with them, then causes the system to associate the cost of $7.50, due to that being the 7th part received and then issued for the FIFO configuration.