Avarage cost vs. FIFO (First In First Out)
The cost of your products and thus the financial inventory value depend on the inventory principle you use. In Rackbeat, you can choose between "average cost" or "FIFO". We will go through the difference between the two here.
If you use the inventory principle of ‘average cost price’, your cost prices are calculated based on the average of all your product purchases.
The advantages of this method are a simpler workflow with less administrative effort and more streamlined inventory management.
Example:
- First purchase: 1 unit at 50 DKK
- Next purchase: 1 unit at 100 DKK
- Average cost price = (50 + 100) / 2 = 75 DKK
- Total value = 150 DKK
If, on the other hand, you use 'FIFO' (First In, First Out), the cost prices are based on the actual purchase prices, with the oldest items leaving inventory first.
This method provides a more accurate picture of product consumption and contribution margin, especially when cost prices are high or fluctuating.
However, FIFO is more complex to manage and requires stricter data discipline and workflow.
Example:
- First purchase: 1 unit at 50 DKK
- Next purchase: 1 unit at 75 DKK
- First sale = cost price 50 DKK
- Next sale = cost price 75 DKK
- Total value = 150 DKK
The choice between ‘average cost price’ and ‘FIFO’ is always made during the installation and setup of your Rackbeat agreement.
We typically recommend the average cost price method, but advise consulting with an accountant or auditor before making a final decision.
NOTE! Once you have made a choice, it is not possible to change the principle at a later time.