Inventory costing methods in Pakistan: FIFO, LIFO, and weighted average explained

Why inventory costing method matters

When you sell a product, you need to record the cost of that product as Cost of Goods Sold (COGS). But if you bought the same product at different prices over time, which price do you use? The three standard methods — FIFO, LIFO, and Weighted Average — each give a different answer, and therefore a different profit figure.

FIFO: First In, First Out

FIFO assumes the oldest inventory is sold first. If you bought 100 units at ₨100 each in January and another 100 at ₨120 each in March, and you sell 100 units in April, FIFO records COGS at ₨100 per unit (the January cost). The remaining inventory is valued at ₨120 per unit. FIFO produces higher profit (and higher tax) in periods of rising prices because you are matching lower costs against current revenues.

LIFO: Last In, First Out

LIFO assumes the most recently purchased inventory is sold first. Using the same example, LIFO would record COGS at ₨120 per unit, producing lower profit and lower tax in rising price environments. Note: LIFO is not permitted under International Financial Reporting Standards (IFRS), which Pakistan largely follows. Check with your accountant before using LIFO.

Weighted Average Cost

The weighted average method calculates an average cost per unit across all purchases. (100 × ₨100 + 100 × ₨120) ÷ 200 = ₨110 per unit. All sales are costed at this average until a new purchase resets the calculation. This is the most common method for businesses with homogeneous inventory and frequent price fluctuations.

Choosing in FinanceOS

FinanceOS supports all three inventory costing methods. You select your preferred method during company setup. The system automatically calculates COGS using your chosen method for every sale and updates the inventory ledger in real time.