Inventory Valuation: FIFO vs Weighted Average vs Specific Identification (SQL Account Focus)

Choosing the right inventory costing method is more than an accounting exercise – it directly affects your reported profits, tax obligations and stock valuations. In Singapore, businesses follow International Financial Reporting Standards (IFRS), which permit methods such as weighted average and first‑in, first‑out (FIFO). SQL Account, one of the most popular SME accounting systems here, supports FIFO and weighted average costing, while more specialised businesses can approximate specific identification using batch or serial‑number tracking. This guide explains how each method works and where it fits best.

1. FIFO – First‑In, First‑Out

With FIFO, you assume that the oldest items in stock are sold first. When inventory has been purchased at different costs over time, the oldest cost is removed from inventory and recognised as cost of goods sold. This means that during periods of rising prices, FIFO reports lower costs of goods sold and higher profits because the oldest (cheapest) units are expensed first. On the balance sheet, FIFO leaves the newest purchases in ending inventory, which better reflects current replacement costs.

In SQL Account, selecting the FIFO costing method instructs the system to apply this cost flow assumption automatically when posting sales. It is particularly suitable for businesses with perishable goods or products that must be sold in sequence, such as food, pharmaceuticals or items with expiry dates.

2. Weighted Average Cost

The weighted average method – sometimes called moving average – smooths out price fluctuations by assigning the average cost of all units available for sale to each unit sold. To calculate it, you divide the total cost of goods available by the total number of units, producing a single cost per unit that applies to both cost of goods sold and ending inventory. Because it averages costs over time, this method is simpler than tracking individual layers and can mitigate the impact of sharp price changes.

SQL Account’s weighted average option automates this calculation. Each time new stock arrives, the system recalculates the average cost; when goods are sold, the cost of goods sold and remaining inventory values update accordingly. This method works well for high‑volume items that are indistinguishable from one another, such as screws, stationery, or bulk commodities.

3. Specific Identification

In certain industries – say jewellery, luxury cars or artwork – every item is unique and has a different cost. The specific identification method tracks each unit’s purchase cost and any related costs until it is sold. It differs from FIFO and weighted average because no assumptions are made about cost flow: you literally attach the actual cost to the specific unit you sell. This approach provides very accurate cost of goods sold and ending inventory values, but it requires a detailed tracking system and can be labour‑intensive.

SQL Account does not have a built‑in specific identification setting. However, you can approximate it by using the serial number or batch tracking modules to tie each product’s purchase cost to its sale. This is more practical for high‑value, low‑volume products rather than for fast‑moving consumer goods.

4. SQL Account’s Costing Options

According to SQL’s documentation, there are three costing methods you can assign to a stock group: FIFO, Fixed Costing and Weighted Average. FIFO assumes the first goods purchased are the first sold. Fixed costing uses a manually maintained unit cost (useful when you set a standard price irrespective of purchase cost), and weighted average divides the total cost of inventory by the number of units to calculate the average cost. If you switch costing methods for existing stock, SQL recommends running Analyse Data Integrity before reviewing your cost reports.

For most Singapore SMEs, weighted average is a sensible default because it’s easy to administer and aligns with IFRS requirements. FIFO may be preferred if your stock has an obvious physical flow or if you want inventory values to reflect recent purchase prices. Specific identification should be reserved for unique items where precise cost matching is crucial – and you’ll need to use SQL’s serial/batch functionality to implement it.

5. Choosing the right method

1. Nature of your goods – For commodities or indistinguishable goods, weighted average keeps things simple. For perishable or sequential goods, FIFO mirrors the actual flow. For unique, high‑value items, specific identification provides accuracy.

2. Price volatility – When supplier prices fluctuate significantly, weighted average smooths the peaks and troughs. FIFO may show higher profits during inflation because older costs are expensed first.

3. System capabilities – SQL Account handles FIFO and weighted average seamlessly. If you need specific identification, plan for additional setup and manual tracking.

   
   

Final Thoughts

Inventory costing isn’t just a technicality; it affects your profit margins, tax bills and decision‑making. SQL Account makes it easy for Singapore SMEs to adopt FIFO or weighted average costing, ensuring compliance with IFRS and the Inland Revenue Authority of Singapore. For businesses dealing in high‑value, unique goods, a specific identification approach is possible with careful tracking.

Need help configuring SQL Account or deciding which inventory costing method suits your business? 

Apscom Solutions can guide you through the options, help set up serial or batch tracking, and ensure your financial reports tell the right story.

Message us today to make inventory valuation less of a headache and more of a strategic advantage.