Inventory Methods Used in Modern Business
Every single retail business has to keep track of the amount of inventory they have on hand
. As straight forward as this may seem, there are multiple ways of which to do so, each with their respective pros and cons. There are three primary inventory methods, the first in first out method, or FIFO. Then you have the last in first out method, also known as LIFO, and last but not least the weighted average method. Each of these methods is chosen based upon their specific manner that they account for their inventory's cost of merchandise.The first method is first in first out, which is also known as the acronym FIFO. The basic principal is that the inventory stock that had arrived first will be the first to hit the shelves and be available for purchase to retail clients. This method is a key aspect in the retail sale of perishable goods like in a grocer or similar situation. An example of this would be as simple as milk. Milk tends to have an expiration date that is within thirty to forty five days after pasteurization, if any other method of inventory would be used, this would jeopardize the available shelf life of their products.
Last in first out, as you may have guessed, is the opposite of first in first out. This is where the most recently acquired inventory stock is the first items that are to be sold. This method is used in the retail sale of non food items and general merchandise that has the ability to sit in stock for a prolonged amount of time without any negative repercussion or influence of their quality or physical appearance. The major issue with this is the susceptibility of price changes in the market. If for an unseen reason, the cost of a retail product goes skyrockets, the last in first out method causes the cost of goods sold to increase dramatically.
The final method is the weighted average method. The genius of this method is in its simplicity. The principal here is the cumulative cost of the entire available inventory, divided by the total number of units in inventory. This method is beneficial for bulk retailers and wholesale outlets who dabble with thousands of the same inventory able items. This method accounts for any price changes whether it is minute or major. Since the average is two cumulative totals, if a major price increase does occur, when the surplus cost is spread out over the entirety of the inventory the actual cost of goods sold will not be as greatly impacted as if using the other methods of inventory.
All the methods of inventory used in modern day business have its benefits and its faults. The applications of their uses are based upon the needs of a specific company. Depending on the type of good being sold, and the quantity of said goods, the appropriate method can be selected simply. Regardless of which method is picked, every cent is always accounted for, and every item present, the only difference is which is right for your needs.
Inventory Methods Used in Modern Business
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