Background
First-in, first-out (FIFO) is an accounting method commonly used in inventory management. It assumes that the materials or products a company purchases or manufactures first are the first to be used, consumed, or sold.
Historical Context
The FIFO accounting convention has roots in the early practices of businesses managing inventory and aiming to match the cost of older inventory with current revenues. It has become a standard method in various industries to enhance logistics and profitability.
Definitions and Concepts
FIFO (First-in, First-out): An accounting convention that assumes that stock that enters inventory first is sold or used first. It is majorly utilized to calculate the cost of goods sold and ending inventory values.
Major Analytical Frameworks
Classical Economics
In classical economics, the management of resources such as inventory is crucial to understanding broader economic phenomena like production and supply chains.
Neoclassical Economics
Neoclassical frameworks analyze FIFO in the context of cost-minimization and rational business decision-making.
Keynesian Economics
Keynesian perspectives might consider FIFO from the standpoint of the operational efficiency of firms and how these inventory practices could influence economic outputs and employment.
Marxian Economics
FIFO can be examined in terms of how inventory management impacts capital turnover and the labor process, potentially affecting surplus value extraction.
Institutional Economics
Delves into how FIFO is standardized in business practices, influenced by institutional norms and accounting standards.
Behavioral Economics
Studies how FIFO strategies can be affected by managerial behavior and market psychology rather than pure cost considerations.
Post-Keynesian Economics
Focuses on the implications of FIFO for firm-level strategies and broader macroeconomic stability.
Austrian Economics
Analyzes how FIFO in inventory management reflects entrepreneurs’ subjective decisions and its role in market equilibration processes.
Development Economics
Considers the influence of FIFO on firms’ operations in developing economies and its role in sustaining supply chains and reducing waste.
Monetarism
Investigates the role of FIFO in secure firm-level pricing strategies and its relationships with broader inflation metrics due to outflows of older, possibly cheaper inventory stock.
Comparative Analysis
Comparing FIFO to other methods like Last-in, First-out (LIFO) involves evaluating how each method affects taxable income, earnings, and inventory cost matching. FIFO often results in lower cost of goods sold when prices are rising, thus showing higher profitability than LIFO.
Case Studies
Reviewing companies like retail giants and manufacturing firms use FIFO in diverse ways to optimize their operations and fiscal reporting.
Suggested Books for Further Studies
- “Financial and Managerial Accounting” by Jerry J. Weygandt
- “Inventory Management and Optimization in SAP ERP” by Marc Hoppe
- “Lean Demand-Driven Procurement: How to apply Lean thinking to your supply chain” by Paul Myerson
Related Terms with Definitions
- Last-in, First-out (LIFO): An accounting method that assumes the newest inventory is used or sold first.
- Average Cost Method: An inventory valuation method calculating the cost of available goods during the period and dividing it by the number of units available.
- Specific Identification Method: An inventory valuation method tracking and costing each individual unit of inventory specifically.
This dictionary entry gives a thorough understanding of the FIFO concept in the context of economic and accounting principles, as well as ways for further exploration.
