--- title: "FIFO and Moving Average" space: "ERPNext" url: "https://docs.frappe.io/erpnext/fifo-and-moving-average" updated: "2026-06-28" --- # FIFO & Moving Average Valuation Methods ## 1. Overview ERPNext values stock **perpetually**: every stock movement (receipt, issue, transfer, manufacture) updates the item's quantity *and* its monetary value in real time through the **Stock Ledger**. The **Valuation Method** decides *how the value of each outgoing unit is calculated* and therefore what your remaining inventory is worth and what your Cost of Goods Sold (COGS) becomes. ERPNext supports three valuation methods: - **FIFO** (First In, First Out) - **Moving Average** - **Standard Cost** *(covered in a separate guide)* This guide explains **FIFO** and **Moving Average** — how each works, the accounting they produce, their behavior with backdated entries and reposting, and the pros and cons of each so you can choose the right one per item. > **Where to set it:** Valuation Method can be set per **Item** (Item master → *Valuation Method*), or defaulted at the **Company** level, or globally in **Stock Settings**. The most specific setting wins (Item → Company → Stock Settings). --- ## 2. FIFO (First In, First Out) ### 2.1 How it works FIFO assumes the **oldest stock is consumed first**. ERPNext maintains a **FIFO queue** of `[quantity, rate]` layers for each item-warehouse. Every receipt adds a layer at its actual incoming rate; every issue consumes layers from the **front** (oldest) of the queue at *their original rates*. The valuation rate reported at any moment is the **weighted average of the layers currently remaining** in the queue, but each outgoing unit is costed at the *specific* rate of the layer it is drawn from. ### 2.2 Worked example | Step | Transaction | Queue after | Stock value | | ---- | ---------------- | ------------------------ | ----------- | | 1 | Receive 10 @ 100 | `[10 @ 100]` | 1,000 | | 2 | Receive 10 @ 120 | `[10 @ 100], [10 @ 120]` | 2,200 | | 3 | Issue 15 | `[5 @ 120]` | 600 | At step 3, the 15 issued units are costed as **10 @ 100 + 5 @ 120 = 1,600** (oldest first). The remaining 5 units stay valued at their original 120. ### 2.3 Accounting impact In a perpetual-inventory company, the issue posts COGS at the **actual layered cost** of the consumed units: - COGS (step 3) = 1,600 - Inventory is credited 1,600; remaining inventory asset = 600. Because outgoing cost reflects the **actual historical purchase price** of the specific units leaving stock, FIFO closely tracks real acquisition cost and is widely accepted for statutory/tax reporting. ### 2.4 Pros - **Closely matches actual cost flow** — the cost of goods sold reflects the genuine price paid for the specific units consumed. - **Realistic ending inventory value** — remaining stock is valued at the most **recent** purchase prices, so the balance sheet reflects current replacement-ish cost. - **Widely accepted** for accounting standards and tax authorities; intuitive and auditable (you can trace which layers were consumed). - **Good for items with shelf life / lot rotation** (food, pharma, perishables) where you physically issue oldest-first anyway. ### 2.5 Cons - **Sensitive to backdated entries** — inserting or editing a past transaction changes which layers later issues consume, so **every subsequent ledger entry must be recomputed (reposted)**. On long, dense ledgers this reposting is slow and resource-intensive. - **Volatile COGS in rising-price environments** — older, cheaper layers are expensed first, which can understate COGS and overstate profit during inflation. - **More computation / storage** — the layer queue must be maintained and serialized for every item-warehouse. - **Heavier reposting load** when corrections, cancellations, or landed-cost vouchers touch historical entries. --- ## 3. Moving Average ### 3.1 How it works Moving Average maintains a **single blended average rate** per item-warehouse. On **every receipt**, the average is recomputed: ``` new average = (existing qty × existing avg rate + incoming qty × incoming rate) ────────────────────────────────────────────────────────────── existing qty + incoming qty ``` Issues are costed at the **current average rate** and do **not** change the average; only receipts (and revaluations) move it. ### 3.2 Worked example | Step | Transaction | Qty on hand | Avg rate | Stock value | | ---- | ---------------- | ----------- | -------- | ----------- | | 1 | Receive 10 @ 100 | 10 | 100 | 1,000 | | 2 | Receive 10 @ 120 | 20 | 110 | 2,200 | | 3 | Issue 15 | 5 | 110 | 550 | At step 2 the average becomes `(10×100 + 10×120) / 20 = 110`. The 15 issued units at step 3 are each costed at **110** → COGS = 1,650; remaining 5 units valued at 110 = 550. ### 3.3 Accounting impact - COGS (step 3) = **1,650** (15 × average 110). - Inventory credited 1,650; remaining inventory asset = 550. Compared with FIFO on the same data, Moving Average **smooths** the cost: COGS is 1,650 vs FIFO's 1,600, and the difference flows into the value of remaining stock. ### 3.4 Pros - **Smooths out price fluctuations** — a single blended rate dampens the impact of volatile purchase prices, giving steadier COGS and margins. - **Simpler and lighter** — only one rate per item-warehouse to maintain; no layer queue to store or walk. - **Easier to understand and reconcile** — "one item, one current cost" is intuitive for operations and reporting. - **Good for homogeneous, fast-moving, commoditized items** where individual lots are indistinguishable (bulk fasteners, fuel, raw chemicals). ### 3.5 Cons - **Still requires reposting on backdated entries** — because a past receipt changes the running average for **all later** transactions, ERPNext must recompute the forward chain. Like FIFO, this can be slow on long ledgers. - **Does not track actual lot cost** — outgoing cost is a blend, so it can diverge from the real price paid for the specific units shipped; less precise for lot-traceable or high-value items. - **Average can lag reality** — in fast-moving price environments the blended rate trails current market cost, which may misstate margins on individual sales. - **Less granular audit trail** — you cannot point to "these specific units left at this specific cost," only to the average at that time. --- ## 4. FIFO vs Moving Average — at a glance | Aspect | FIFO | Moving Average | | -------------------------------- | ----------------------------------------------- | -------------------------------------------- | | **Outgoing cost basis** | Actual rate of the oldest remaining layer | Current blended average rate | | **Tracks real lot cost?** | Yes (layer-accurate) | No (blended) | | **COGS behavior** | Reflects oldest prices first | Smoothed across all receipts | | **Ending inventory value** | At most recent purchase prices | At the blended average | | **Data maintained** | Queue of `[qty, rate]` layers | Single average rate | | **Backdated entry → reposting?** | **Yes** (recompute forward chain) | **Yes** (recompute forward chain) | | **Computation cost** | Higher (layer walking) | Lower (single rate) | | **Best for** | Perishables, lot-rotated, audit-sensitive items | Homogeneous, high-volume, commoditized items | | **Statutory acceptance** | Very widely accepted | Widely accepted | --- ## 5. The shared limitation: backdated entries trigger reposting This is the most important operational characteristic both methods share — and the key contrast with **Standard Cost**. With **both FIFO and Moving Average**, the value of any stock ledger entry depends on **the entries before it** (which layers exist, or what the running average is). So when you: - insert a **backdated** transaction, - **cancel** or **amend** a historical voucher, - apply a **Landed Cost Voucher** to a past receipt, or - change a past valuation rate, …ERPNext must **repost** — recompute the quantity, rate, value, and GL impact of **every subsequent stock ledger entry** for that item-warehouse (a *Repost Item Valuation* job). On items with long, dense histories this is **slow, resource-heavy, and temporarily changes the value of stock you considered settled**. > If your organization frequently records **backdated corrections** and this reposting cost is painful, consider the **Standard Cost** method (see the separate *Standard Valuation Rate* guide), where the rate is known by date and backdated entries do **not** trigger reposting. --- ## 6. Choosing a method — recommendations | Your situation | Recommended method | | ------------------------------------------------------------------ | ------------------------------------ | | Perishable / shelf-life items, physically issued oldest-first | **FIFO** | | High-value or lot-traceable items needing precise cost | **FIFO** | | Statutory/tax regime that expects actual cost flow | **FIFO** | | Homogeneous, commoditized, fast-moving items | **Moving Average** | | You want smoother, more stable margins | **Moving Average** | | You want minimal valuation maintenance overhead | **Moving Average** | | You frequently post **backdated** entries and reposting hurts | **Standard Cost** *(separate guide)* | | You want predictable, fixed product cost & isolated price variance | **Standard Cost** *(separate guide)* | ### Best practices (both methods) - **Set the method before the item transacts.** Changing an item's valuation method while stock exists is disruptive and may be blocked. - **Enable perpetual inventory accounts** (warehouse/stock, stock-received-but-not-billed, COGS, stock adjustment) so valuation and GL stay in lock-step. - **Batch your historical corrections** and run them in low-traffic windows, since they trigger reposting. - **Use Landed Cost Vouchers promptly** after receipt to avoid large retroactive revaluations later. - **Reconcile stock value vs. GL** periodically (Stock Ledger / Stock Balance vs. the inventory account) to catch drift early. - **Be consistent per item category** so reporting and margins are comparable across similar items. --- ## 7. Summary - **FIFO** costs outgoing stock at the **actual rate of the oldest remaining layer** — precise, audit-friendly, ideal for perishables and lot-traceable goods, but layer-heavy and reposting-sensitive. - **Moving Average** costs outgoing stock at a **single blended rate** — simple, smooth, ideal for commoditized high-volume items, but less precise and still reposting-sensitive. - **Both** recompute (repost) the forward ledger when the past changes. If that cost is the deciding factor, the **Standard Cost** method avoids it entirely — see the *Standard Valuation Rate* guide.