Inventory Valuation: FIFO vs Average vs Standard Cost

Your inventory valuation method decides what each unit of stock is worth on the balance sheet, and what cost hits the P&L when you sell it. It's one of the few ERP settings that's genuinely painful to change later, so it's worth ten minutes to understand properly.

Let's use one simple example throughout.

You buy 100 units at $10. A month later, you buy 100 more at $12. Then you sell 150 units.

FIFO (first in, first out)

FIFO assumes you sell the oldest stock first.

• 100 units sold at $10 = $1,000
• 50 units sold at $12 = $600
• Cost of goods sold: $1,600
• Remaining stock: 50 units at $12 = $600

Good for: businesses where purchase prices move, and perishable or dated goods where the physical flow really is FIFO.

Watch out for: in an ERP, FIFO needs the system to track cost layers. Returns and backdated receipts can make the numbers harder to follow.

Average cost (AVCO)

Average cost recalculates the unit cost each time you receive stock.

• After both purchases: 200 units, total $2,200, average $11
• Cost of goods sold: 150 x $11 = $1,650
• Remaining stock: 50 x $11 = $550

Good for: commodity-style items where individual batches aren't really distinguishable, and businesses that want simple, smooth costs.

Watch out for: a receipt at a wrong price (a typo, or a missing landed cost) distorts the average for everything that follows.

Standard cost

You set a fixed cost per product, say $11. Every movement is valued at $11. Differences between the standard and the actual purchase price go to a variance account.

• Cost of goods sold: 150 x $11 = $1,650
• Remaining stock: 50 x $11 = $550
• Purchase price variance: $1,000 + $1,200 - (200 x $11) = $0 in this case. In real life, it rarely zeroes out.

Good for: manufacturers who want stable product costs and a clear view of purchasing and production variances.

Watch out for: standards need regular review. Out-of-date standards turn variance accounts into a dumping ground.

How this works in Odoo

In Odoo, you set the costing method per product category: Standard Price, Average Cost (AVCO) or First In First Out (FIFO). You also choose valuation:

• Manual (periodic). Stock movements don't post accounting entries. Finance adjusts inventory value periodically.
• Automated (perpetual). Every receipt and delivery posts a journal entry. This is what most businesses want once their stock data is reliable.

Landed costs (freight, duty, insurance) can be added to receipts so they flow into FIFO and AVCO costs. Use them. Ignoring freight understates your real cost, sometimes by a lot.

Which one should you choose?

Agree it with your accountant, write it down, and set it per category before you load opening stock.

Changing your mind later

You can change it, but stock has to be revalued, and existing cost layers get collapsed. Your accountant will need to explain the change. Do it at a year-end if you must, and never casually.

More on the inventory side in our inventory management guide, and on the accounting side in Odoo accounting setup.