FIFO, short for first in, first out, is an inventory costing method that assumes the oldest units you bought or made are the first ones you sold. Under FIFO, the cost of your earliest batches moves to cost of goods sold (COGS) first. COGS is what it cost to make or buy the products you sold. Your most recent costs stay in ending inventory, the value of products still on hand. For CPG brands buying ingredients and packaging at shifting prices, that method affects reported gross profit and the inventory value lenders and investors see.
FIFO works by lining up your inventory purchases in the order they arrived and assigning costs to each sale from the oldest purchase first. The IRS describes FIFO as assuming the items you purchased or produced first are the first ones sold, with ending inventory matched to your most recent costs.
Picture a granola brand that produces two batches of the same 12-ounce bag:
January batch: 10,000 bags at $2.00 each, or $20,000
March batch: 10,000 bags at $2.40 each, or $24,000
The second batch cost more because oats and packaging film went up. In April, the brand sells 12,000 bags to retailers at $6.00 each, for $72,000 in revenue.
FIFO assigns the cost of all 10,000 January bags first, then 2,000 bags from March:
10,000 × $2.00 = $20,000
2,000 × $2.40 = $4,800
FIFO COGS = $24,800
The 8,000 bags still on the shelf carry the March cost, so ending inventory is $19,200.
FIFO is an accounting assumption. It describes how costs move through your books, whether or not the warehouse ships those exact bags first.
FIFO affects COGS and gross profit by tying your reported costs to older prices. Gross profit is revenue minus COGS. When costs are rising, older purchases are cheaper, so FIFO reports lower COGS and higher gross profit than a method that counts newer costs first.
Back to the granola brand. FIFO puts COGS at $24,800, leaving $47,200 in gross profit. That’s a gross margin of about 65.6%, meaning roughly 66 cents of every sales dollar remains after product costs.
Under LIFO (last in, first out), which counts the newest costs first, the same sale would carry $28,000 in COGS and $44,000 in gross profit. The brand sold the same bags for the same price, and the costing method alone moved reported profit by $3,200.
The IRS confirms the pattern: when prices rise, FIFO produces lower COGS and higher closing inventory than LIFO, and the reverse holds when prices fall.
That gap can mislead pricing decisions. Your profit and loss statement (P&L) may show a 65.6% margin while every new batch you order costs $2.40. If you approve a promotion or a new retail price based on the older margin, the deal may not hold up once the cheaper inventory sells through. Review your current batch costs next to your reported margin before you commit.
Higher reported profit can also mean higher taxable income, so ask your tax professional how your method affects your return.
For a refresher on COGS and gross margin, read CPG Accounting Terms Every Founder Should Know.
FIFO matters for perishable products because it usually mirrors how those products should physically move. Brands selling beverages, snacks, refrigerated foods, or supplements typically rotate older stock out first to limit spoilage. A FIFO method tends to reflect what’s happening in the warehouse.
That alignment makes your numbers easier to reconcile. When the costs in your financial reports match the batches that shipped, it’s simpler to spot write-offs for expired product and see which production runs earned their margin.
Perishable brands may also buy in smaller, more frequent batches because of shelf life, and each one can carry a different cost. Tracking those costs separately is part of what makes CPG accounting different from general business accounting.
Some warehouses ship by expiration date, a practice called first expired, first out (FEFO). That’s a physical rotation rule, and your accounting method doesn’t have to match it exactly. Your accounting team can tell you whether the difference matters for your books.
FIFO differs from LIFO and weighted average in the order it assigns costs to the products you sell.
LIFO assumes your newest units sell first. It’s permitted for U.S. federal tax purposes, but adopting it requires filing Form 970, and the IRS calls its rules very complex. Companies that report under International Financial Reporting Standards (IFRS) can’t use it. The standard for inventory, IAS 2, assigns cost to interchangeable inventory using FIFO or weighted average.
Weighted average spreads total cost across all units. If a granola brand’s two batches of 10,000 bags cost $44,000 in total, each bag carries an average cost of $2.20, which puts COGS at $26,400 for 12,000 bags sold. This method smooths out price swings, which can help when ingredient costs move up and down.
Specific identification tracks the actual cost of each item and suits products that aren’t interchangeable. Cases of the same SKU usually are interchangeable, so the IRS points businesses to FIFO or LIFO when items can’t be tied to specific invoices.
No. FIFO can fit perishable CPG products well, but the right method depends on your products, cost trends, reporting requirements, and tax situation. A Fractional Controller or CPA should weigh those factors with you.
Consistency matters as much as the choice. The IRS requires inventory practices to stay consistent from year to year, and changing how you value inventory generally requires IRS approval through Form 3115. A method picked casually in year one can limit your options later.
Questions to ask your accounting team:
FIFO requires records that show when each batch arrived and what it cost. Without receiving dates and batch-level costs, your system can’t tell which batch to expense first, and COGS becomes an estimate.
Batch cost should include more than the manufacturer’s invoice. Landed cost is the full cost of getting product ready to sell, including freight-in and duties, and each batch can carry a different amount.
“At any given time, you need to know what you have and where it is,” said Matt Lynn, Inventory Accounting Manager at BELAY, in a conversation with Taste Radio. FIFO depends on that visibility. Your inventory platform and accounting system need to agree on quantities and costs, and physical counts need to confirm both.
Accurate batch costs also show how much cash each production run ties up before it sells. How Much Cash Is Trapped in Your Inventory? explains how that affects your cash flow.
BELAY Financial Solutions matches CPG brands with U.S.-based Financial Experts who understand inventory costing and the financial reports that depend on it.
Depending on your needs, BELAY can provide Bookkeeping, Full-Service Payroll, Tax Services, Inventory Consulting, a Full-Service Accounting Team, a Fractional Controller, or a Fractional CFO. When it’s time to implement an inventory management system, BELAY’s CPG team can help set it up so batch costs flow into your books correctly.
As Walker Brothers Kombucha grew past $2 million in annual revenue, the craft beverage brand’s previous provider wasn’t handling COGS correctly. Its chart of accounts, the list of categories that organizes a company’s transactions, didn’t follow CPG standards either. Working with Accountfully, a BELAY company, Walker Brothers rebuilt its chart of accounts and got accurate COGS reporting.
“Now when we pitch to investors, we have financials that are clear, reliable, and easy to verify,” said Caroline Howard, Co-Founder and Head of Strategy and Operations at Walker Brothers Kombucha.
BELAY typically closes your books within 10 to 15 days of month end and delivers monthly financial packages, so you’re reviewing current margins when you make pricing and purchasing decisions. For a closer look, read How Does BELAY Handle Inventory Accounting for CPG Brands?
Schedule a consultation with BELAY Financial Solutions to talk through your inventory costing and financial reporting needs. It takes less than 2 minutes.
FIFO stands for first in, first out. It’s an inventory costing method that assigns the cost of your oldest inventory to goods sold first, leaving your most recent costs in ending inventory.
When costs are rising, FIFO usually reports lower COGS and higher gross profit than LIFO because older, cheaper costs are expensed first. When costs fall, the effect reverses. The cash you spent on inventory stays the same under any method.
There’s no single required method for every CPG company. U.S. businesses can generally choose among accepted methods, including FIFO and LIFO, as long as they apply their choice consistently. Companies that report under IFRS can’t use LIFO.
You can, but it takes IRS filings. Adopting LIFO requires filing Form 970 with your tax return, and other inventory method changes generally require IRS approval through Form 3115. Talk with your CPA first, since a change affects reported income.
They’re different practices. FIFO is an accounting method for assigning costs. First expired, first out (FEFO) is a warehouse practice for shipping the product closest to expiration first. A brand can use FEFO in the warehouse and FIFO in its books.