Costing Method Considerations

Why choose the FIFO Costing Method?

With GoldFinch’s advanced FIFO Costing Method, we are able to capture real-time and accurate sales and profitability while still closing accounting periods on time. 

Although Average, Standard, LIFO, and FIFO are all acceptable costing methods for manufacturers and distributors, GoldFinch recommends FIFO for companies who process a substantial amount of transactions, have multiple formula levels, and require transferring orders between multiple warehouses, for the following reasons:

1. Inventory cost calculations are always accurate and up to date for each of the sales shipments and sales invoices, even when selling inventory before the final vendor invoice is received. Changes in the inventory valuation due to "timing" only affect General Ledger in the open accounting period, not in the closed accounting periods.

2. Any mistakes with inventory costs only affect one layer of inventory and the subsequent outbound inventory transactions for that layer; correcting a mistake is much faster and less risky.

3. You will be able to add additional costs (ex. landed costs) to any layer of inventory or to write off costs for obsolete inventory without affecting other layers of the inventory.

4. A minimal month-end inventory reconciliation effort is needed, as GoldFinch automatically recalculates the "timing difference" to ensure that the inventory General Ledger cost matches with the Subledger Cost.

5. GoldFinch also tracks inventory costs that have been received but not invoiced, shipped but not invoiced, and output but not costed.

6. We provide various standard costing fields on the item card with a roll-up capability.

   1. You must populate the Standard Cost field for service items.

   2. It is recommended to populate the Standard Cost field for inventory items.

   3. Read Process Standard Cost Worksheet for Items with Standard Costing Method to learn how to roll up standard costs or inventory items.

Why not the Average Costing Method?

1. The Average Costing Method typically would generate a lot of cost adjustment entries (and consume a lot of Salesforce data storage) due to the change in inventory value because of “timing”, or “correcting mistakes”. The system would have to recalculate outbound costs for all inventory layers, not just one specific layer like FIFO.

2. When you add additional costs (ex. landed costs) to any layer of inventory or write off costs for obsolete inventory, you will affect all layers of the inventory, not just one specific layer like FIFO. Thus, COGS calculation for a specific Sales Invoice might not reflect the actual costs.

Why not the Standard Costing Method?

Although the Standard Costing method is easy to implement, it does not offer accurate costing for each transaction. It takes a substantial amount of manual effort at the period end to decide the "correct" purchase cost for raw materials and to roll up standard costs to the parent items.  Analyzing and reclassifying various variances at the month's end is also time-consuming. In addition, with the Standard Costing method, there is no way to track additional costs or to write off costs to a specific layer of inventory.