# Inventory costing methods

## First In First Out (FIFO)

Brightpearl uses the first in first out (FIFO) method of valuing inventory.

This means that the items added into stock first will be sold first. Financially, this means that for each sale the profit margins are calculated using the value of the oldest item in stock.

### Example

10 items are purchased at \$10 each, then another 5 of the same item are purchased at \$15 each.

• The total in stock quantity = 10 + 5 = 15 items
• The total in stock value = (10 × \$10) + (5 × \$15) = \$100 + \$75 = \$175

Then a sale is placed for 12 of this product. Using the FIFO method, the oldest items are removed first, which is the batch of 10 at \$10 per unit. The 2 remaining units are taken from the second batch, valued at \$15 each.

This makes the total cost of the sale:

• 10 units at \$10 = \$100
• 2 units at \$15 = \$30
• Total value removed from stock = \$100 + \$30 = \$130

And the total value remaining in stock = \$175 - \$130 = \$45 (which is also equal to 3 units at \$15 each)

## Returned stock (sales credits)

When items are received on a purchase order, you know the cost because the prices are defined by what you pay your supplier.

However, when items are received back on a sales credit, the cost of the item will be either:

• Cost price list

The value on the cost price list assigned to the sales credit

• Actual cost using Last Out First In (LOFI)

The actual value of the last of this SKU which was shipped against the parent sales order. This option needs to be enabled in the settings and will apply only to sales credits created after activation.

To use the actual LOFI cost, activate it at Settings > Sales > Sales settings.

Note: LOFI costs will only be used when the following conditions are met, otherwise the value on the cost price list assigned to the credit will be used:

• The sales credit is cloned from an original sales order created directly in Brightpearl - i.e. it does not apply to credits created by channel integrations
• The sales credit was created after the LOFI costing method was activated in your settings