I’ve been going through a number of inventory management terms for the past few weeks to make sure you’re familiar with them. Last week I defined Cycle Counting. Next up is Costing Method. Costing Method – The way that a final product’s total cost is calculated. That definition is a little vague, so let’s go through the main costing methods so you can see how they work:
- First in, First Out – FIFO applies the cost of the oldest product to newer copies of that product, even if it’s not the same.
- Last in, First Out – LIFO is the opposite of FIFO. It applies the cost of the most recent product to every other copy, no matter when it was purchased.
- Average Cost – Instead of using the amount you spent to get a particular item, you take the average of how much it cost to get every copy of it over time.
- Standard Cost – Manufacturers add up the costs of all the parts in a bill of materials, labor costs, and other costs incurred in the manufacturing process to come up with a final cost for each final product.
- Actual Cost – Similar to Standard Cost, this method compares the actual costs incurred in building a product to what is listed in a work order.
- Landed Cost – This goes beyond the manufacturing of a product and includes costs related to delivery, taxes, duties, and any other applicable fees.