FIFO or weighted average: valuing your stock
Two ways to decide what the goods you just sold actually cost you.
Last checked 20 September 2026
When you buy the same item at different prices, you need a rule to decide what the units you just sold cost you. FIFO assumes the oldest stock sells first. Weighted average blends every purchase into one cost. The choice changes your reported profit and the value of stock on your balance sheet.
The problem, in one example
You bought 100 units at ₹80, then 100 more at ₹95. You sell 120. What did those 120 cost?
| Method | Cost of the 120 sold | Value of the 80 left |
|---|---|---|
| FIFO | (100 × ₹80) + (20 × ₹95) = ₹ 9,900 | 80 × ₹95 = ₹ 7,600 |
| Weighted average | 120 × ₹87.50 = ₹ 10,500 | 80 × ₹87.50 = ₹ 7,000 |
The weighted average cost is (100 × 80 + 100 × 95) ÷ 200 = ₹87.50. Same goods, same sales, ₹600 difference in reported profit — and the difference sits in closing stock, so it reverses in a later period.
FIFO
First in, first out. Costs are used in the order they were incurred.
| For | Against |
|---|---|
| Matches how goods physically move in most warehouses | More to track — you need the layers |
| Closing stock is valued at recent prices, so the balance sheet is realistic | In a rising market, shows higher profit and therefore higher tax |
| Natural fit where batches are already tracked |
Weighted average
Every purchase is blended into one running cost.
| For | Against |
|---|---|
| Simple — one cost per item | Closing stock can drift away from current market prices |
| Smooths out price swings | Loses the link between a unit and what it actually cost |
| Works well for interchangeable goods | Harder to reason about for dated or serialised goods |
What about LIFO?
Last in, first out is not permitted under Indian accounting standards. It appears in older textbooks and in US material. Do not use it.
Which to choose
It is an accounting policy decision — take it with your accountant, and then apply it consistently. Two practical pointers:
- If you already track batches with their own costs, FIFO is close to free, because you have the layers anyway.
- If your goods are genuinely interchangeable and prices are stable, weighted average is less work for the same answer.
Consistency matters more than the choice
Switching methods to flatter a year’s results is exactly the thing accounting standards exist to prevent. Pick one, disclose it, keep it.
Valuation is not the same as picking order
FIFO here is an accounting rule about costs. FEFO — first expired, first out — is a physical rule about which carton to take off the shelf. A pharmacy distributor typically picks FEFO and may value on either basis. Do not let the similar names confuse the two. See batch tracking and FEFO.
Margin & Markup Calculator — free, no signupOnce you know your cost, work out margin, markup and the price for a target margin.Does GST care which method I use?
GST is charged on your selling price, so valuation does not change the tax on a sale. It affects your income-tax profit and your balance sheet.
Where do freight and duties go?
Costs of bringing stock to its present location and condition generally form part of its cost. GST that you can claim as input credit does not — it is recoverable, not a cost.
How do I value damaged or expired stock?
At the lower of cost and net realisable value — so goods that cannot be sold for what they cost are written down. Expired stock is usually written off entirely.
Free tools for this
Related reading
What is inventory management?
Knowing what you hold, what it cost, and what to do before it runs out or goes stale.
Batch tracking and FEFO
Why dated goods need first-expired-first-out, not first-in-first-out.
Stock turnover and dead stock
How fast your money goes round, and how much of it has stopped moving.