FIFO, LIFO or weighted average for a furniture store

The same oak dining chair arrives in three lots at landed costs of $300, $330, and $375. Sell twelve after all the lots have arrived, and the cost of goods can be $3,660 under FIFO, $4,020 under weighted average, or $4,410 under LIFO.

This illustrative example shows what a costing method does: it assigns recorded stock costs to sales. It does not change what you paid the vendor or which chair the warehouse physically selects. Choose the method as part of the store's accounting policy, then use it consistently.

General information, not tax or accounting advice.

Start with complete landed costs

Each lot in the example contains ten identical chairs. The $300, $330, and $375 unit costs already include the inbound charges assigned to those receipts. Total available stock is 30 chairs costing $10,050.

The landed-cost guide covers the work required before choosing which cost leaves with a sale. A method applied consistently to incomplete costs still produces an incomplete margin.

Keep configuration and location in view. This example uses interchangeable chairs in the same cost pool. It does not combine oak with walnut, an upholstered seat with a wood seat, or a custom piece reserved for a particular customer.

Compare the three methods on the same sale

FIFO means first in, first out: assign the earliest available costs first. LIFO means last in, first out: assign the latest available costs first. Moving weighted average blends the available stock's cost as purchases and supported stock movements change the pool.

The weighted average is $10,050 ÷ 30 = $335. The example assumes every receipt happened before the sale. The difference between FIFO and LIFO cost of goods is $750, with an equal and opposite difference in ending inventory.

None of the methods creates an extra vendor payment. Each divides the same $10,050 between goods sold and goods remaining. Comparing profit without looking at the remaining inventory tells only part of the story.

Use FIFO when receipt order gives a clear explanation

FIFO is easy to explain through the receipt history: the oldest available costs leave first. In the rising-cost example, earlier lower costs reach cost of goods while later higher costs remain in stock.

The IRS's comparison of FIFO and LIFO describes that relationship and notes that falling prices reverse it. FIFO is not a promise of higher or lower profit in every period; the receipt pattern matters.

The physical warehouse can still choose units for practical reasons, including condition, access, and customer commitments. Keep a sample's scuff or a replacement cushion in its own record. An accounting method should not be asked to remember which chair has spent the season nearest the espresso machine.

Use moving weighted average to blend comparable receipts

Moving weighted average spreads the cost of the available pool across its units. It can make repeated purchases of the same configuration easier to compare when freight and vendor costs differ between receipts.

The timing of sales matters. Suppose a chair is sold after only the first ten-chair lot arrives. Its average-cost basis at that time is $300, not the eventual $335 calculated after all three lots. Later receipts change the pool used for subsequent sales.

Do not describe moving average as a simple year-end average of every purchase regardless of when stock left. A clear system keeps the sequence of receipts and sales, along with any supported cost corrections.

Average only goods that belong together. A premium fabric option should not disappear into the average cost of a cheaper configuration merely because both share a model name.

Treat LIFO as an accounting decision with reporting obligations

For U.S. federal tax purposes, LIFO carries requirements beyond selecting a setting. 26 U.S.C. § 472 sets out the election framework and the conformity condition for the covered reporting to owners and for credit purposes.

IRS Publication 538 explains adopting LIFO with Form 970 and the procedures for accounting-method changes. Ask your CPA to evaluate the method, reporting conformity, required filings, and any later change before altering the store's system.

When costs rise, LIFO can assign more cost to current sales and lower reported income compared with FIFO. That result is conditional on the stock and cost pattern. It is not a general promise of permanent tax savings, and drawing down older layers can have different consequences.

LIFO is also not universally permitted across accounting frameworks. The IFRS Foundation's IAS 2 summary identifies FIFO or weighted average for ordinarily interchangeable inventory. Establish which financial-reporting framework your store uses before assuming every software choice is an available accounting choice.

Check the small-business rules without discarding the stock records

Some U.S. businesses can use the inventory exceptions in 26 U.S.C. § 471(c), subject to the gross-receipts test and other conditions. The threshold is indexed, so a number remembered from another tax year is not a reliable eligibility check.

That question belongs in the accounting review. Even when a simplified tax treatment is available, the showroom still needs to know what it owns, what it paid, and which customer has a claim on a particular piece.

Do not confuse “a different tax inventory method” with “no need to record receipts.” Operational stock and margin records remain useful for buying, pricing, and receiving.

Keep special orders attached to their own receipts

A unit purchased for a specific customer can carry the cost of the receipt that supplied it. In OrderPilot, that linked special-order cost is distinct from the method used to draw interchangeable stock.

Suppose a customer-specific chair arrives with a $330 landed cost. Its linked purchase does not become a $335 chair merely because unrelated stock lots happen to average that amount.

The costing-method choice matters most when the store sells from a pool of floor or warehouse stock. Keep the purchasing source and reservation intact through receiving and fulfillment, rather than letting a customer commitment become general stock by accident.

Choose the method in OrderPilot with a clear effective date

Settings › Purchasing & accounting › Costing presents FIFO, LIFO, and moving weighted average, with a worked example and effective-from date. Authorized staff should enter the choice agreed for the business and record why and when it applies. OrderPilot retains receipt costs and the method used for a costed order. Changing the setting does not simply restate every earlier sale under the new method. Corrections to the underlying receipt cost are a separate process and retain their own evidence.

Stock costs are drawn when goods are fulfilled, including supported Shopify-native online and POS flows. Connected QuickBooks cost-of-goods posting follows the configured costing records and posting settings.

Understand why Shopify shows one weighted-average number

Shopify's cost-per-item field holds one value per variant. Its inventory guidance distinguishes that static field from weighted-average costing and landed-cost allocation.

OrderPilot publishes a weighted-average stock value into that field while keeping the detailed layers used by its costing method. A Shopify variant field therefore does not display the separate FIFO cost assigned to every historical sale. Read the Shopify cost-per-item explanation before comparing reports. Then reconcile the accounting flow through the QuickBooks setup guide.

Treat floor samples and returns as real stock events

A floor sample should retain its identifiable configuration, receipt cost, and condition. Choose the store's costing method for its stock pool rather than changing methods to make a single sample's margin look better.

Wear, damage, or a markdown requires its own assessment. A costing method does not erase a torn seam or establish the selling price the sample can achieve.

A restocked return likewise needs to restore the supported cost rather than adopt an unrelated current catalog cost. The restocked-return guide covers that handoff.

Before changing methods later, document the accounting decision, effective date, opening balances, and report reconciliation. Use gross-margin comparisons only after the figures are measured on a comparable basis. The right method is the one the business can apply and explain consistently.

Sources

1. 26 U.S.C. § 472: last-in, first-out inventories — U.S. Code, reproduced by Cornell Legal Information Institute; U.S. federal law as of March 12, 2025.
2. 26 U.S.C. § 471(c): small-business inventory exception — U.S. Code, reproduced by Cornell Legal Information Institute; U.S. federal law as of March 12, 2025.
3. Publication 538: accounting periods and methods — Internal Revenue Service.
4. IAS 2: Inventories — IFRS Foundation.
5. Inventory management: track inventory costs — Shopify Help Center.