FIFO, short for first in, first out, is the inventory principle under which the oldest units in stock are sold, shipped or consumed first. In e-commerce and retail inventory management, FIFO has two related meanings: a physical stock rotation rule that tells the warehouse which units to pick, and a cost flow assumption that tells accounting which purchase costs to assign to goods sold.
Both meanings follow the same logic of a queue: units leave in the order in which they arrived. The physical rule protects product freshness and reduces obsolescence, while the accounting method determines cost of goods sold, gross margin and the value of ending inventory. A business can apply one without the other, but many apply both because they reflect the same real flow of goods.
How FIFO works in the warehouse
In the warehouse, FIFO means that pickers take units from the oldest receipt first. Each receipt is identified by a receiving date and a batch or lot number, and the warehouse management system directs picking to the earliest available lot.
- Lot or batch tracking records the receiving date for every quantity in stock.
- Allocation rules in the warehouse management system assign orders to the oldest lots.
- Location design supports rotation, for example gravity flow racks loaded from the back and picked from the front.
- Shelf restocking in stores places new stock behind existing stock.
Physical FIFO matters most for goods that age, expire or go out of fashion: food, cosmetics, supplements, batteries, adhesives and seasonal products. For durable goods without aging risk, strict physical FIFO adds handling effort with little benefit, and many warehouses then pick by location efficiency instead.
Some businesses use a looser form of rotation, sometimes called date-controlled picking, in which any lot within a tolerance window may be picked. This keeps routes short while still preventing very old stock from remaining in the warehouse. The tolerance must be shorter than the remaining shelf life required by customers or marketplaces, which often set minimum dates for inbound goods.
FIFO as an inventory costing method
As a costing method, FIFO assumes that the earliest purchase costs are the first to be expensed as cost of goods sold. Ending inventory is therefore valued at the most recent purchase costs. This assumption is applied to the accounting records even when physical units cannot be traced individually.
The following worked case shows FIFO costing for one product purchased at rising prices and then partly sold.
| Event | Units | Unit cost | FIFO result |
|---|---|---|---|
| Purchase in January | 100 | 10.00 | Inventory 1,000 |
| Purchase in February | 100 | 12.00 | Inventory 2,200 |
| Sale in March | 150 | Mixed | Cost of goods sold 1,600 |
| Ending inventory | 50 | 12.00 | Inventory 600 |
The 150 units sold are costed as 100 units at 10.00 plus 50 units at 12.00, giving 1,600. The remaining 50 units carry the newer cost of 12.00. Under the same data, a weighted average method would cost every unit at 11.00 and report cost of goods sold of 1,650.
FIFO compared with other inventory methods
FIFO is one of several cost flow and rotation rules. The right choice depends on product characteristics, accounting framework and operational capability.
| Method | Rule | Typical use | Key consequence |
|---|---|---|---|
| FIFO | Oldest units leave first | Most retail and e-commerce stock | Inventory near current cost |
| LIFO | Newest units leave first | Some businesses under US GAAP | Not permitted under IFRS |
| FEFO | Earliest expiry leaves first | Food, pharma, cosmetics | Physical rule only, not costing |
| Weighted average | Average cost of all units | Interchangeable goods | Smooths price changes |
| Specific identification | Actual cost of each unit | Cars, jewelry, serialized items | Precise but labor-intensive |
FEFO, first expired, first out, is the most important physical variant. When shelf life differs between lots, a batch received later can expire earlier, and FEFO then overrides FIFO. Many warehouse systems support both rules and apply FEFO for dated products and FIFO for the rest.
Financial effects of FIFO
The financial effect of FIFO depends on the direction of purchase prices. When costs rise, FIFO expenses older and cheaper units first, so reported profit is higher than under LIFO or weighted average. When costs fall, the effect reverses.
| Price trend | Cost of goods sold | Gross profit | Ending inventory |
|---|---|---|---|
| Rising costs | Lower than other methods | Higher | Close to replacement cost |
| Falling costs | Higher than other methods | Lower | Close to replacement cost |
| Stable costs | Similar to other methods | Similar | Similar |
Higher reported profit under inflation can also mean higher income tax, which is the main reason some US companies have used LIFO. Under IFRS, LIFO is prohibited, so FIFO and weighted average are the standard choices for most international companies. Whatever the method, accounting standards require consistent application from period to period.
Implementing FIFO correctly
Correct FIFO depends on reliable receiving data and disciplined handling. Most failures arise from shortcuts on the warehouse floor or from systems that do not record lots.
| Problem | Cause | Fix |
|---|---|---|
| Expired stock found behind fresh stock | Restocking in front of old units | Load from the back, train staff |
| Costing differs from physical flow | No lot data in the system | Record lots at receiving |
| Old lots stranded in reserve | Picking from nearest location only | Enforce lot allocation rules |
| Margin swings between periods | Large purchase price changes | Explain FIFO effects in reporting |
| Returns mixed with new stock | Returned units relabeled as new | Inspect and assign correct lot |
In multichannel e-commerce, FIFO also interacts with stock synchronization and fulfillment through a 3PL. Merchants should confirm that the 3PL’s warehouse management system applies FIFO or FEFO by lot and reports lot data back, otherwise dead stock can accumulate unnoticed in reserve locations.
A plain-language summary
FIFO means the first items to arrive are the first to leave, like a line at a bakery counter where the person who came first is served first. A shop that receives milk on Monday and again on Wednesday sells Monday’s milk before Wednesday’s.
Accountants use the same idea to decide which purchase prices count as the cost of what was sold. The older prices are used first, and whatever is left in stock is valued at the newer prices.
An example from practice
An online store selling natural cosmetics keeps about 600 products, each with a shelf life of 12 to 30 months. Before improving its processes, it regularly discovered expired creams in reserve locations during cycle counting and had to write them off.
The store starts recording lot numbers and expiry dates at receiving, sets its warehouse system to allocate orders by FEFO, and reorganizes fast-moving products into flow racks loaded from the back. Its accounting continues to use FIFO costing. Within two quarters, write-offs for expired goods fall sharply, and the cost of goods sold reported each month now matches the actual sequence of purchases much more closely.