FIFO vs Weighted-Average Costing: Which Cost, and Why It Matters
When you buy the same item at different prices over time, which cost do you use when you sell one? FIFO and weighted average give different answers — and the choice quietly changes your reported profit, your stock value, and your tax.
Here is a problem every business with stock faces and few consciously decide: you bought 100 units of an item at KES 50 in January and 100 more at KES 60 in March. In April you sell one. What did that unit cost you — 50, 60, or something in between? The answer is not a fact of nature; it is an accounting choice called a cost-flow assumption, and the two most common answers are FIFO and weighted average. The choice is invisible day to day, but it flows straight into your cost of goods sold, your gross profit, the value of the stock on your balance sheet, and ultimately your tax.
FIFO: first in, first out
FIFO assumes the oldest stock is sold first, so the cost assigned to a sale is the cost of the earliest purchases still on hand. In the example, the first unit sold in April costs KES 50 — the January price — because FIFO works through the old stock before the new. This means the stock remaining on your balance sheet is valued at the most recent prices, which keeps your inventory value close to current replacement cost. In a period of rising prices, FIFO produces a lower cost of goods sold and therefore a higher reported profit.
Weighted average: blend it all together
Weighted average takes a different view: it pools all units of an item and assigns each sale the average cost of everything on hand. With 100 units at 50 and 100 at 60, the weighted average cost is KES 55, and every sale — and the remaining stock — is valued at that blended figure until the next purchase shifts the average. It smooths out price fluctuations rather than tracking which batch was sold, which makes it simpler to run and less volatile, at the cost of stock values that lag current prices.
| FIFO | Weighted average | |
|---|---|---|
| Cost assigned to a sale | Cost of the oldest stock on hand | Blended average of all stock |
| Stock value on balance sheet | Close to current/replacement cost | A lagging blended figure |
| In rising prices | Lower COGS, higher profit | Smoothed COGS and profit |
| Volatility of margins | Reflects real batch costs | Smoothed across purchases |
| Complexity | Tracks batches by age | Simpler — one moving average |
FIFO the costing method vs FEFO the physical rule
A common confusion: FIFO as a costing method is about which cost you assign, not which physical unit you pick off the shelf. You can run FIFO costing while physically selling any unit. This is different from FEFO — first expired, first out — which is a physical picking rule for perishable goods, driven by expiry dates rather than cost. Many businesses use FEFO physically (to avoid expiry) and weighted average for costing; the two decisions are independent, and conflating them causes needless argument.
Which should you choose?
For most Kenyan SMEs, weighted average is the pragmatic default: simpler to run, less volatile, and perfectly acceptable under IFRS (which Kenya follows). FIFO suits businesses that want stock valued near replacement cost or that genuinely move stock in batches. What matters most is consistency — pick one, apply it uniformly, and do not switch method to flatter a period's profit, because that is exactly what auditors and KRA look for.
Whichever method you use, the point is that it should be applied automatically and consistently by your system, not recalculated by hand. When purchases, stock movements, and sales all flow through one system, the cost-flow assumption is enforced on every transaction — so your cost of goods sold and inventory value are correct and defensible without anyone maintaining a spreadsheet of batch costs that drifts the moment prices move.
Costing applied consistently, automatically
See FIFO or weighted-average costing enforced on every sale, with stock value and cost of goods sold always correct and defensible.
Explore inventory managementFrequently asked questions
What is the difference between FIFO and weighted-average costing?
Both decide what cost to assign when you sell an item bought at different prices. FIFO assumes the oldest stock sells first, so sales carry the earliest costs and remaining stock is valued near current prices. Weighted average pools all units and assigns each sale the blended average cost. The choice changes reported cost of goods sold, profit, and stock value even though nothing physical differs.
Which method gives higher profit?
In a period of rising prices, FIFO produces a lower cost of goods sold (because older, cheaper costs are expensed first) and therefore a higher reported profit, with stock valued near replacement cost. Weighted average smooths costs and profit across purchases. In falling prices the effect reverses.
Is FIFO the same as FEFO?
No. FIFO is a costing method about which cost you assign to a sale; FEFO (first expired, first out) is a physical picking rule for perishable goods, based on expiry dates. They are independent decisions — many businesses physically pick by FEFO to avoid expiry while using weighted average for costing.
Which costing method should a Kenyan business use?
Weighted average is the pragmatic default for most SMEs — simpler, less volatile, and acceptable under IFRS, which Kenya follows. FIFO suits businesses wanting stock valued near replacement cost or that move stock in genuine batches. The critical rule is consistency: apply one method uniformly and do not switch it to flatter a period, which auditors and KRA scrutinize.
