First In First Out (FIFO): The Inventory Method That Prevents Waste and Ensures Quality

Aleksander Nowak · 2026-02-20 · Industry Guides

FIFO for manufacturers, not retail. How to use oldest materials first, implement lot traceability, and stay recall-ready

First In First Out (FIFO): The Inventory Method That Prevents Waste and Ensures Quality

FIFO isn't just an accounting term. For manufacturers, it's a practical system that determines which materials get used first — and that decision affects product quality, regulatory compliance, and how much inventory you throw away.

The principle is simple: use the oldest stock before the newest. The bag of flour that arrived three weeks ago gets used before the one that came yesterday. The fragrance oils purchased in January get used before the February batch.

This guide explains how FIFO works in manufacturing environments, why it matters beyond bookkeeping, and how to implement it in your production process.

What Is FIFO?

FIFO stands for First In, First Out. It means the first items that enter your inventory are the first ones you use or sell.

Most explanations focus on retail: the oldest products on the shelf should sell first. But for manufacturers, FIFO applies to raw materials — and the stakes are different.

Retail FIFO: Sell older products before they expire on the shelf.

Manufacturing FIFO: Use older materials in production before they degrade or expire.

When you follow FIFO in production, the shea butter that arrived in January gets used before the shea butter from February. The packaging ordered first gets used first. The principle applies to everything that has a shelf life or could degrade over time.

Why FIFO Matters for Manufacturers

Prevents Expiration and Waste

Raw materials don't last forever. Oils can go rancid. Fragrances lose potency. Food ingredients expire. Even seemingly stable materials can degrade over months or years.

Without a system, newer materials tend to get used first — they're on top of the pile, easier to reach, fresher in memory. Meanwhile, older stock sits in the back, eventually becoming unusable.

FIFO reverses this. By deliberately using oldest materials first, you minimize waste from expiration.

Example: A soap maker receives coconut oil shipments monthly. Without FIFO, the newest delivery sits near the workstation and gets used first. The January shipment stays in back storage. By summer, it's rancid — 20kg of waste worth hundreds of dollars. With FIFO, January's oil would have been used in February's production, long before degradation.

Ensures Consistent Quality

Materials change over time, even within their shelf life. Essential oils lose volatile compounds. Colors can shift. Active ingredients in cosmetics become less potent.

Using older materials first means your products contain ingredients at their freshest relative to when they'll be used. A face cream made with 6-month-old vitamin E differs from one made with 2-week-old vitamin E — even if both are technically within specification.

Supports Regulatory Compliance

Many industries require lot traceability — the ability to track which batches of materials went into which finished products. Food, cosmetics, pharmaceuticals, and supplements all face these requirements.

FIFO creates predictable material flow that simplifies traceability. When you know older lots get used first, you can more easily document which supplier batches ended up in which production runs.

Accurate Cost Tracking

For accounting purposes, FIFO assigns costs in the order materials were purchased. If ingredient prices rise over time, FIFO means your older (cheaper) costs get expensed first, while your newer (more expensive) inventory stays on the books.

This approach is accepted under both US GAAP and international accounting standards. It often reflects actual physical flow better than alternatives like LIFO (Last In, First Out).

How FIFO Works: A Manufacturing Example

Let's trace FIFO through a real scenario.

Situation: A bakery uses flour to make bread. They receive shipments weekly.

Inventory: - January 5: Received 100kg flour @ $1.20/kg (Lot A) - January 12: Received 100kg flour @ $1.25/kg (Lot B)
- January 19: Received 100kg flour @ $1.30/kg (Lot C)

Total inventory: 300kg

Production (January 20): Recipe calls for 150kg flour.

Without FIFO: The baker grabs Lot C (most recent, most accessible). Uses all 100kg of Lot C plus 50kg of Lot B. Lot A sits untouched.

With FIFO: The baker uses Lot A first (oldest). Uses all 100kg of Lot A plus 50kg of Lot B. Lot C remains for future production.

Remaining inventory after FIFO: - 50kg from Lot B ($1.25/kg) - 100kg from Lot C ($1.30/kg)

Cost of Goods Sold calculation: - 100kg × $1.20 = $120 (from Lot A) - 50kg × $1.25 = $62.50 (from Lot B) - Total COGS: $182.50

The bakery used their oldest flour first. If Lot A had been sitting another month while Lots B and C got used, it might have degraded or attracted pests. FIFO prevents that scenario.

FIFO vs LIFO vs Weighted Average

Three main methods exist for tracking which inventory gets used:

FIFO advantages: - Matches physical flow for perishables - Widely accepted (GAAP and IFRS) - Reduces waste from expiration - Simplifies lot traceability

FIFO disadvantages: - Higher taxes during inflation (lower COGS = higher profit) - Requires tracking inventory by batch/date

When LIFO might work: Non-perishable goods with rising prices, where tax savings matter more than physical flow. Note: LIFO isn't allowed under international accounting standards.

When Weighted Average works: Commodity materials where batches are indistinguishable and prices are stable. Simpler record-keeping but loses batch-level visibility.

For most manufacturers — especially those handling food, cosmetics, or other products with shelf life concerns — FIFO is the standard choice.

First In First Out vs FEFO: When Expiration Dates Override Receipt Dates

The standard approach uses receipt date as the deciding factor: materials received first get used first. But what if expiration dates don't align with receipt dates?

Scenario: You receive two batches of the same ingredient: - March 1: 50kg with expiration date September 30 - March 15: 50kg with expiration date August 31 (shorter shelf life from supplier)

Strict first-in-first-out would use the March 1 batch first. But the March 15 batch expires sooner. Using receipt-date logic means the shorter-dated batch sits while the longer-dated batch gets used — potentially leading to waste.

FEFO (First Expired, First Out) solves this by prioritizing expiration date over receipt date. The August-expiring batch gets used first, even though it arrived later.

For manufacturers dealing with variable shelf lives, FEFO often makes more sense than pure date-of-receipt ordering. Many inventory systems support both approaches — you track by receipt date but pick based on expiration.

Implementing This Method in Your Operation

Physical Organization

This approach only works if your physical setup supports it.

Storage layout: Arrange materials so older stock is accessible. New deliveries go to the back; picks come from the front. This might mean dedicated lanes, rotating stock during receiving, or color-coded date labels.

Clear labeling: Every batch should show receipt date or expiration date visibly. If workers can't quickly identify which materials are oldest, they'll grab whatever's convenient.

Receiving discipline: When new materials arrive, they go behind existing stock — not in front. This simple habit prevents newer materials from blocking access to older ones.

Software Support

Manual tracking works for simple operations but becomes error-prone as complexity grows.

Inventory software can: - Automatically suggest which batch to use based on receipt or expiration date - Track lot numbers through receiving, production, and shipping - Alert when materials approach expiration - Calculate COGS using the first-in-first-out method automatically - Generate traceability reports for compliance

The key feature is batch-level tracking. Systems that only track total quantity (50kg of flour) can't support this approach. You need systems that track by lot (25kg from Lot A, 25kg from Lot B).

Staff Training

Systems and organization only work if people follow them. Training should cover:

Why this matters: Staff who understand the purpose make better decisions when situations aren't black-and-white.

How to identify oldest stock: Whether through labels, locations, or software lookups.

What to do with exceptions: Damaged materials, returns, and partial batches all create edge cases. Clear guidelines prevent confusion.

Recording correctly: If software tracks batch usage, workers need to log which specific batches they used — not just quantities.

Lot Traceability and Recall Readiness

Using oldest materials first creates predictable flow, which simplifies traceability. Combined with lot tracking, you can answer critical questions:

Forward traceability: "This batch of raw material went into which finished products?"

If supplier lot ABC123 has a quality issue, you can identify which production batches used that material and which customers received affected products.

Backward traceability: "This finished product used materials from which batches?"

If a customer reports a problem, you can trace their product back to specific raw material lots and supplier shipments.

First-in-first-out makes this easier because material flow is sequential. Without it, a given supplier lot might be partially used across many production runs over months, complicating trace-back.

Recall scenario: A supplier notifies you that their lot #7890, shipped January 15, has contamination.

With proper tracking: 1. Query: "Which production batches used lot #7890?" 2. Find: Batches B-101 through B-105 (January 20-February 3) 3. Query: "Which customers received products from those batches?" 4. Result: List of affected customers and quantities

Without this system, you might need to recall all production from that time period — or worse, have no way to identify affected products at all.

How Krafte Handles This

Krafte supports first-in-first-out through batch-level inventory tracking designed for small manufacturers.

Lot tracking at receiving: Record supplier lot numbers, receipt dates, and expiration dates when materials arrive.

Automatic oldest-first suggestions: When you start production, the system suggests which material batches to use based on oldest first.

Expiration alerts: Get notified when materials approach their expiration dates, so you can prioritize them in production.

Full traceability: See which raw material lots went into which production batches. Generate recall-ready reports in seconds.

Batch genealogy: Track materials from supplier delivery through production to customer shipment. Complete chain of custody for regulated industries.

The system handles the tracking automatically. You focus on making products while the method runs in the background.

Frequently Asked Questions

What is the FIFO inventory method?

FIFO (First In, First Out) is an inventory management approach where the oldest materials or products are used or sold first. For manufacturers, this means raw materials received earliest are consumed in production before newer deliveries. FIFO reduces waste from expiration and ensures consistent product quality.

How do you calculate FIFO cost of goods sold?

Assign costs in the order materials were purchased. If you bought 100 units at $10, then 100 units at $12, and sold 150 units, your COGS would be: (100 × $10) + (50 × $12) = $1,600. The oldest costs are expensed first; newer costs remain in inventory.

What's the difference between FIFO and LIFO?

FIFO uses oldest inventory first; LIFO uses newest inventory first. FIFO matches physical flow for perishables and is accepted worldwide. LIFO can reduce taxes during inflation but isn't allowed under international accounting standards. Most manufacturers use FIFO.

Is FIFO better than weighted average?

For manufacturers with batch-level tracking needs (lot numbers, expiration dates, traceability), FIFO is usually better. Weighted average is simpler but loses batch-level visibility. If materials are truly interchangeable commodities, weighted average can work. For anything with shelf life or compliance requirements, FIFO is preferred.

What is FEFO and how does it differ from FIFO?

FEFO (First Expired, First Out) prioritizes expiration date rather than receipt date. If a newer delivery has a shorter shelf life than existing stock, FEFO would use the newer (shorter-dated) batch first. FEFO is common in food and pharmaceutical industries where expiration drives picking decisions.

How do I implement FIFO without software?

Physical organization is key: store newer materials behind older ones, label everything with receipt or expiration dates, and train staff to pick from the "oldest" location first. Use separate storage areas or color-coded labels for different time periods. This works for simple operations but becomes difficult as inventory grows.

Tags: Inventory Management