If you always paid the same price for stock, costing it would be trivial. You do not. Suppliers raise prices, freight changes, a currency moves. When you sell one unit from a shelf that holds units bought at different prices, the costing method decides which price that sale carries — and therefore your gross margin, your closing stock value and, in many countries, your tax.
One example, three answers
You buy 100 units at 10, then 100 more at 12. You sell 150 units at 20 each, for revenue of 3,000.
| Method | Cost of goods sold | Gross profit | Closing stock (50 units) |
|---|---|---|---|
| FIFO — first in, first out | 100×10 + 50×12 = 1,600 | 1,400 | 50×12 = 600 |
| Weighted average | 150×11 = 1,650 | 1,350 | 50×11 = 550 |
| LIFO — last in, first out | 100×12 + 50×10 = 1,700 | 1,300 | 50×10 = 500 |
What each method is good at
- FIFO matches how most physical stock actually moves, especially anything perishable or dated. Closing stock is valued close to current prices, so the balance sheet is realistic.
- Weighted average smooths price swings and is simple to explain. It suits interchangeable goods held in bulk — fuel, grain, screws, bottled products.
- LIFO puts the newest costs into cost of sales. It is prohibited under IFRS, so it is unavailable in most of the world; it remains permitted under US GAAP and US tax rules, where a business that uses it for tax must also use it in its financial statements.
- Specific identification tracks the actual cost of each individual item. IAS 2 requires it for goods that are not ordinarily interchangeable — cars, jewellery, custom-built equipment.
Questions people actually ask
Is FIFO or weighted average better for a small business?
FIFO, if your stock is sold roughly in the order it arrives or can expire. Weighted average, if your goods are identical and mixed together. Both are accepted under IFRS.
Why is LIFO not allowed under IFRS?
Because it can leave very old costs on the balance sheet, so closing stock no longer reflects what the inventory is worth. IAS 2 removed it as an option.
What is the difference between periodic and moving weighted average?
A periodic average is calculated once for the whole period. A moving average is recalculated after every purchase, so each sale is costed at the average at that moment. Software usually uses the moving version.
Where these facts come from
Checked against the following on 15 October 2026. Rules and dates change — if you are reading this long after that date, verify before you act on it.
WisoBooks is a bookkeeping and business-management tool, not an accounting, tax or legal advisor. Nothing on this page is tax advice, and tax rules change. Confirm your own obligations with the relevant authority or a qualified advisor.
