An inventory costing method is the rule your accounts use to decide what a sold item 'cost', when you bought the same item at different prices over time. It directly affects your gross profit, your stock value and your tax — so it is worth understanding.
Weighted average cost
This blends all your purchase costs into one average cost per unit, recalculated as you buy more. It smooths out price swings and is simple and fair — which is why many trading and manufacturing businesses use it. AmalERP uses weighted-average costing.
FIFO (First In, First Out)
FIFO assumes the oldest stock is sold first, so the cost of a sale is based on your earliest purchase prices. In times of rising prices, FIFO shows higher profit (and higher tax), because older, cheaper costs are matched against today's sales.
Specific identification
Here you track the exact cost of each individual item — practical only for high-value, uniquely identifiable goods (vehicles, machinery, large marble slabs). It is the most precise but the most effort.
How the method changes your numbers
- Cost of goods sold (and therefore gross profit) changes with the method.
- Your closing stock value on the balance sheet changes too.
- Because profit changes, your tax can change.
- Consistency matters — you should not switch methods to flatter your numbers.
Which should you use?
For most SMEs, weighted average is the practical default: simple, stable and accurate enough. Use specific identification only for big, individually-tracked items. Whatever you choose, let your software calculate it automatically — manual costing is where errors creep in.
In short
Weighted average, FIFO and specific identification each value your stock differently and change your reported profit. AmalERP uses weighted-average costing (with import landed cost included) so your margins and stock value stay accurate automatically.