Interactive Online Stock Card Generator: Weighted Average, FIFO (First-In, First-Out) and LIFO (Last-In, First-Out)

What is a stock card? How to establish it? Understand stock cards, output valuation methods, input valuations... You'll find everything in detail with a free online simulator: Enter the movements and generate a downloadable card .

Interactive Stock Card

Filling: for input and initial stock, you need to enter the quantity and the unit cost. For outputs, you only need to fill in the quantity. You can add other movements (up to 100).

What is Stock?

Generally, companies need to build up inventory, which represents a quantity immediately available. For example, a retailer cannot tell a customer who wants to buy a chocolate bar to wait 2 days! The stock for a store represents the goods on display and the goods in the warehouse. It is necessary to understand inventory movements and know how to value inputs and outputs.

Inventory Valuation Methods

Weighted Average Cost (WAC) After Each Input

The WAC is recalculated after each input of goods by dividing the total value of the inventory (value of the previous inventory + value of new inputs) by the total quantity in stock (previous quantity + quantity entered).

Advantages:

• Smooths out price fluctuations.
• Simple method to understand and apply.
• Provides a more stable valuation in a context of variable prices.

Disadvantages:

• Requires constant updating after each inventory movement.
• May not reflect the actual value of the most recent or oldest items.

Periodic Weighted Average Cost (Periodic WAC)

The WAC is calculated at the end of a period (month, quarter, etc.) by dividing the total value of goods available for sale during that period by the total quantity available for sale.

Advantages:

• Less frequent calculation than WAC after each input.
• Also smooths out price fluctuations over the period.
• Administratively simpler to manage than WAC after each input.

Disadvantages:

• Does not reflect the value of the inventory at the precise time of the output.
• May mask the impact of significant price variations during the period.

First-In, First-Out (FIFO)

This method assumes that the first items entered into inventory are the first ones to leave. The cost of goods sold is therefore based on the cost of the oldest purchases.

Advantages:

• Generally reflects the physical flow of goods (especially for perishable products).
• The valuation of the ending inventory is based on the most recent costs, which is relevant during periods of inflation.
• Intuitive and easy-to-understand method.

Disadvantages:

• May lead to an undervaluation of profit during periods of inflation (older and lower costs are charged to the income statement).
• Lot management can be complex.

Last-In, First-Out (LIFO)

This method assumes that the last items entered into inventory are the first ones to leave. The cost of goods sold is therefore based on the cost of the most recent purchases.

Advantages:

• Better reflects the current cost of goods sold in the income statement during periods of inflation.
• May have tax advantages in certain contexts (not applicable everywhere).

Disadvantages:

• Does not generally correspond to the actual physical flow of goods.
• The valuation of the ending inventory is based on the oldest costs, which may be less relevant during periods of inflation.
• More complex method to implement and less accepted by International Financial Reporting Standards (IFRS).

Types of Inventory

There are generally three types of inventory:

• Merchandise Inventory: Products purchased to be sold without any transformation
• Raw Materials Inventory: Products purchased and then transformed or used to manufacture something else
• Finished Goods Inventory: Products manufactured by the company

To better understand these concepts, let's take an example:

The "Alpha" company is a pastry shop in Canada that:

• Makes cakes
• Sells soft drinks

This company must store several types of products:

• Raw materials (butter, eggs, ...)
• Finished goods (cakes)
• Merchandise (soft drinks)

Suppose this company stores all these products in a giant refrigerator. Here, we clearly see that this company cannot wait for a customer's order to make them a cake or to buy them a can of soft drink. It must therefore have a sufficient quantity for at least a few days of work. Similarly, it must have a sufficient quantity of raw materials.

Cost of Inventory Inputs

The concept of input differs depending on the type of inventory:

What is the input cost of raw materials?

Raw materials (eggs, butter, etc.) are purchased. Therefore, the input is the purchase. During the purchase, a purchase cost is calculated:

Purchase Cost = Net Price + Direct Costs

Example: a pastry shop buys 1000 eggs at 0.40 CAD each. Delivery costs 20 CAD

Overall Purchase Cost = 1000 * 0.4 + 20 = 420 CAD

Unit Purchase Cost = 420 / 1000 = 0.42 CAD

We buy these items and then put them in the refrigerator, so we store them. Here, it is obvious that the purchase price may differ from one period to another. For example, for eggs, we can buy today at 0.40 CAD per unit and 0.50 CAD another day.

What is the input cost of merchandise?

Merchandise (canned soft drinks) is purchased. Therefore, the input is the purchase. During the purchase, a purchase cost is calculated in the same way as for raw materials.

What is the input cost of finished goods?

Finished goods (croissants, brioche, cakes, ...) are manufactured. Therefore, the input is production. A production cost can be calculated to know the value of the inputs.

Production Cost = Cost of materials consumed + Direct and indirect manufacturing overheads

Example: A pastry shop made 500 pieces of cake. It incurred the following costs: Raw materials: 100 CAD, Direct costs: 120 CAD, Indirect costs: 180 CAD

Overall Production Cost = 100 + 120 + 180 = 400 CAD

Unit Production Cost = 400 / 500 = 0.80 CAD

For cakes, the pastry shop makes them (they are not purchased). Then, it will store them: they are put in the refrigerator, so they are stored.

Here, it is obvious that the production cost can differ from one time to another. For example, a piece may cost 0.80 CAD per unit today and 0.85 CAD another day, because this cost depends on the cost of the raw materials consumed.

Note There are several methods to calculate the production cost, among which the full costing method based on direct and indirect costs. An explanation of this method is provided with an interactive application here Full Costs

Cost of Inventory Outputs

Initially, it is important to understand the concept of output. For our pastry shop, we can ask the following question: If something leaves the refrigerator, where does it go?

What is the cost of merchandise outputs?

If a can of soft drink is taken out, then we understand that it has been sold! So, for merchandise, outputs represent sales. The cost of outputs is the cost of goods sold.

Cost of Outputs = Quantity Sold * Unit Purchase Cost

It often happens that we find ourselves in a situation where there are several batches in stock with different unit purchase costs. In this case, we must use one of the inventory valuation methods: WAC, FIFO, LIFO...

Note The cost of outputs or purchase cost of goods sold is different from the concept of turnover.

Turnover = Quantity Sold * Unit Selling Price

Example For a period P

• Initial Stock = 150 units at 5 CAD per unit
• Input (purchase): 350 units at 6 CAD per unit
• Output (sales): 100 units sold at 8 CAD each
• Ending Stock = 400 units

If we want to know the cost of outputs (100 units sold), we find that the company has 2 different unit costs. Which one to choose?

If we use the WAC method, then we calculate the WAC = (150 * 5 + 350 * 6) / (150 + 350) = 5.70 CAD

Cost of goods sold = 100 * 5.70 = 570 CAD

If we use the FIFO method, then we use the oldest unit cost

Cost of goods sold = 100 * 5 = 500 CAD

If we use the LIFO method, then we use the most recent unit cost

Cost of goods sold = 100 * 6 = 600 CAD

The choice of a method has a direct influence on the value of outputs but also on the value of the ending stock.

For this example, Turnover = 100 * 8 = 800 CAD

We can thus calculate the overall or unit gross profit margin

Gross Profit Margin = Turnover - Cost of Goods Sold

If we use WAC, then gross profit margin = 800 - 570 = 230 CAD

If we use FIFO, then gross profit margin = 800 - 500 = 300 CAD

The choice of a method has a direct influence on the gross profit margin.

What is the cost of materials outputs?

If 40 eggs are taken out of the refrigerator, then we understand that they have been used to make a cake! So, for materials, outputs represent the consumption of materials in the workshops. In fact, if an egg enters the refrigerator, the output will also be an egg. Generally, we calculate the cost of materials outputs to use it in the calculation of the production cost or to record it in the balance sheet. Since purchase costs are different, we must use one of the methods mentioned above.

To calculate the quantity consumed (output), we can use the formula:

Outputs = Initial Stock + Purchases - Ending Stock

How to calculate the cost of finished goods outputs?

If a piece of cake is taken out, then we understand that it has been sold! So, for finished goods, outputs represent sales.

Cost of Outputs = Production Cost of Finished Goods Sold

Cost of Outputs = Quantity Sold * Unit Production Cost

If there are several unit production costs, we use an appropriate method.

To calculate the quantity sold (output), from the quantity produced (Input), we can use the formula:

Output = Initial Stock + Inputs - Ending Stock

Finally, it should be remembered that the cost of finished goods sold is different from turnover.