Overview
Inventory costing decides what cost QBM uses when stock leaves inventory. This affects cost of goods sold, gross profit, stock value, and inventory reports.
QBM supports three main costing methods for inventory items: FIFO, LIFO, and Average. The selected method tells QBM which cost should be attached to sales, delivery notes, customer credits, transfers, and other stock movements.
Where To Find It
The costing method is selected on the item record where the Costing Method field is visible. The available choices are Average, FIFO, and LIFO when the edition and permissions allow cost methods.
Existing item history should be reviewed carefully before changing the method on an item that already has purchases, sales, adjustments, or transfers.
Method Comparison
| Method | Plain Meaning | Main Advantage | Best Fit |
|---|---|---|---|
| FIFO | First in, first out. QBM costs the issue using the oldest available purchase layer first. | Often matches the physical flow of stock, especially for dated, expiring, or batch-managed items. | Food, medicine, fast-moving retail, and items where older stock should be sold first. |
| LIFO | Last in, first out. QBM costs the issue using the newest available purchase layer first. | Can reflect current replacement cost more quickly when purchase prices change often. | Businesses that intentionally value outgoing stock using the most recent purchase costs, subject to accounting approval. |
| Average | QBM keeps one running average cost for the item instead of choosing a specific purchase layer. | Simpler to understand and smoother when purchase prices move up and down. | High-volume items, mixed stock, and businesses that do not need layer-by-layer costing. |
FIFO
FIFO means QBM assumes the oldest stock is used first. When a sale or delivery reduces stock, QBM looks back through earlier purchases and consumes those older costs before newer costs.
Advantages
- Easy for many users to understand because it follows normal stock rotation.
- Useful for items with expiry dates, best-before dates, batches, or older stock that should be cleared first.
- Leaves newer purchase costs in closing stock, which can make inventory value closer to recent buying prices.
- Supports clearer investigation when users need to trace how old purchase costs were used.
LIFO
LIFO means QBM assumes the newest stock is used first. When a sale or delivery reduces stock, QBM uses the most recent purchase cost before moving backward to older purchases.
Advantages
- Uses recent purchase costs quickly, which can help when replacement costs change often.
- Can make sales margin review more sensitive to the latest buying price.
- May suit internal management reporting where the company wants outgoing stock cost to follow recent costs.
Average Cost
Average costing keeps one average unit cost for the item. When new stock is purchased, QBM blends the new purchase cost with the existing stock cost. When stock is sold, QBM normally uses the current average cost and does not create a separate cost layer.
Advantages
- Simpler than layer-based costing because users review one current average cost.
- Smooths price changes instead of making each sale depend on one exact purchase layer.
- Works well for bulk, mixed, or interchangeable items where units are not physically separated by purchase batch.
- Often easier for daily operations, reporting, and support teams to explain.
Simple Example
Assume an item has these purchases:
| Movement | Quantity | Unit Cost | Total Cost |
|---|---|---|---|
| First purchase | 10 | 5.00 | 50.00 |
| Second purchase | 10 | 7.00 | 70.00 |
| Sale | 12 | Calculated by method | Calculated by method |
| Method | How The Sale Cost Is Calculated | Sale Cost | Remaining Stock Value |
|---|---|---|---|
| FIFO | 10 units at 5.00, then 2 units at 7.00. | 64.00 | 8 units at 7.00 = 56.00 |
| LIFO | 10 units at 7.00, then 2 units at 5.00. | 80.00 | 8 units at 5.00 = 40.00 |
| Average | Average cost is 120.00 divided by 20 units = 6.00 per unit. | 72.00 | 8 units at 6.00 = 48.00 |
How QBM Applies Costing
QBM reads the costing method from the item. If no valid method is selected, QBM treats the item as Average cost so transactions still have a cost basis.
| Situation | What QBM Does In Plain Language |
|---|---|
| FIFO or LIFO sale/delivery/customer credit | QBM reviews the item movement history in date order and applies the correct purchase layers to the outgoing quantity. |
| FIFO or LIFO negative stock | If stock was issued before enough stock was available, QBM keeps that missing quantity in mind and uses the next available purchase cost when possible. |
| Fallback cost needed | If QBM cannot fully resolve a layer cost, it uses a safe fallback such as recent purchase cost, recent sale cost, or average cost so the transaction is not left without a value. |
| Average purchase or stock-in movement | QBM blends the incoming cost with the existing quantity and cost to calculate a new average cost. |
| Average sale or stock-out movement | QBM normally uses the current average cost for the outgoing stock. The average cost itself is not changed just because stock was sold. |
| Transfers | Transfers keep stock value moving with the item. They usually use the current cost rather than creating a new purchase cost. |
| Adjustments | Adjustments can use average or adjustment cost behavior depending on whether the adjustment is changing quantity, cost, or both. |
| Lot or serial tracked items | Company settings may tell QBM to use lot average cost or serial last cost for those tracked items. |
Choosing A Method
- Confirm the method allowed by your accountant, tax adviser, and reporting rules.
- Choose FIFO when stock rotation and older-stock-first movement matter.
- Choose LIFO only when your finance policy approves newest-cost-first valuation.
- Choose Average when items are interchangeable and users need a simpler costing model.
- Test one item with sample purchases and sales before applying a method widely.
- Review inventory valuation, Kardex, gross profit, and item stock reports after setup.
Best Practice
- Set the costing method before the item is used in live transactions whenever possible.
- Avoid changing the costing method after a long transaction history unless finance has reviewed the effect.
- Keep purchase costs accurate because they directly affect FIFO, LIFO, and Average results.
- Do not allow negative stock unless the business process requires it; negative stock can force QBM to use later or fallback costing.
- Use Inventory Kardex and stock valuation reports to review whether costs look reasonable.
- Use one consistent method for similar item groups unless there is a clear business reason to differ.