--- title: "Weighted average or FIFO? Choosing a costing method for a trading company" description: "Weighted average vs FIFO, worked through a month of receipts and sales: how each changes cost of sales and stock value, plus standard cost and IAS 2." url: https://1flux.ai/blog/weighted-average-vs-fifo last_updated: 2026-10-11 --- Inventory accounting # Weighted average or FIFO? Choosing a costing method for a trading company Weighted average vs FIFO, worked through with real numbers, plus standard cost as a third option and what IAS 2 allows. Purchasing and inventory 7 min read Updated 10 October 2026 Example Sale on 15 September: 150 units · SAR FIFO Oldest layer first 3 Sep · 100 × 40.00 10 Sep · 200 × 46.00 100 × 40.00 + 50 × 46.00 6,300 Weighted average One blended cost 300 units · average 44.00 150 × 44.00 6,600 The same 300 units, two cost formulas: FIFO takes the oldest layers first; weighted average blends them into one cost. ## In short Weighted average vs FIFO comes down to which cost a sale carries. Weighted average values each sale at the average cost of the stock on hand. FIFO (first in, first out) values it at the cost of the oldest stock first. When purchase prices rise, FIFO shows lower cost of sales, higher margins and a higher closing stock value; weighted average smooths the swings. IAS 2 permits both and prohibits LIFO. 1flux lets each legal entity choose weighted average, FIFO or standard cost. ## Why does the costing method matter? The costing method decides what each unit you sell cost you, when identical units were bought at different prices. A trading company buys the same item many times a year, and the price moves with suppliers, currencies and commodities. The units on the shelf look the same. The method decides which price goes to cost of sales and which stays in stock. That choice flows straight into the numbers people care about: - **gross margin** on every invoice and in every monthly report; - **closing stock value** on the balance sheet; - **how stable margins look** from month to month; - **how much work** your stock records and reconciliations take. It doesn’t change the cash you paid. Over the life of the stock, every method charges the same total cost. It changes when that cost reaches the profit and loss account. ## How do weighted average and FIFO work? Both methods start from the same receipts. They differ in how a sale picks its cost. **[FIFO](https://1flux.ai/glossary/fifo)** assumes the oldest stock is sold first. Each receipt forms a cost layer; a sale uses up the oldest layer before touching the next. The stock left at the end is valued at the most recent purchase prices. **[Weighted average cost](https://1flux.ai/glossary/weighted-average-cost)** blends every unit of an item into one average cost. IAS 2 describes two ways to calculate it: on a periodic basis, or as each additional shipment is received. The second is often called a moving or running average. A system that costs each sale as it happens uses the moving average, because the period hasn’t ended yet. Neither method needs to match how your storekeepers actually pick. They are cost formulas, not picking rules. ## Weighted average vs FIFO: a worked example Here is one month for one fictional item, a ½-inch brass ball valve, at a trading company in Saudi Arabia. All amounts are in SAR. | Date | Movement | Units | Unit cost or price | Value | | ------ | -------- | ----- | ------------------ | ------------- | | 3 Sep | Receipt | 100 | 40.00 | 4,000 | | 10 Sep | Receipt | 200 | 46.00 | 9,200 | | 15 Sep | Sale | 150 | sold at 60.00 | revenue 9,000 | | 22 Sep | Receipt | 100 | 50.00 | 5,000 | | 28 Sep | Sale | 120 | sold at 62.00 | revenue 7,440 | Fictional example. Amounts in SAR. Total purchases are 400 units for SAR 18,200. Total sales are 270 units for SAR 16,440, leaving 130 units in stock. ### FIFO - **15 Sep sale (150 units):** the 100 oldest units at 40.00, then 50 at 46.00. Cost of sales: 4,000 + 2,300 = **SAR 6,300**. - **28 Sep sale (120 units):** 120 of the remaining 150 units at 46.00. Cost of sales: **SAR 5,520**. - **Closing stock (130 units):** 30 at 46.00 plus 100 at 50.00 = **SAR 6,380**. ### Moving weighted average - **After 10 Sep:** 300 units costing 13,200, so the average is **44.00**. - **15 Sep sale:** 150 × 44.00 = **SAR 6,600**. 150 units remain at 44.00 (6,600). - **After 22 Sep:** 250 units costing 6,600 + 5,000 = 11,600, so the average is **46.40**. - **28 Sep sale:** 120 × 46.40 = **SAR 5,568**. - **Closing stock:** 130 × 46.40 = **SAR 6,032**. ### Periodic weighted average Averaging the whole month at once: 18,200 ÷ 400 units = **45.50**. Cost of sales is 270 × 45.50 = **SAR 12,285**; closing stock is 130 × 45.50 = **SAR 5,915**. ### The result side by side | SAR | FIFO | Moving weighted average | Periodic weighted average | | ------------------------------------ | ------ | ----------------------- | ------------------------- | | Revenue | 16,440 | 16,440 | 16,440 | | Cost of sales | 11,820 | 12,168 | 12,285 | | Gross profit | 4,620 | 4,272 | 4,155 | | Gross margin | 28.1% | 26.0% | 25.3% | | Closing stock (130 units) | 6,380 | 6,032 | 5,915 | | Check: cost of sales + closing stock | 18,200 | 18,200 | 18,200 | Every method accounts for the same SAR 18,200; only the timing differs. Every method accounts for the same SAR 18,200. In a month of rising prices, FIFO reports SAR 348 more gross profit than the moving average, and carries exactly SAR 348 more in closing stock. Next month, when that stock is sold, the difference reverses. ## What changes when prices fall? When purchase prices fall, the picture flips. FIFO charges the older, higher costs to cost of sales first, so margins look thinner and closing stock carries the newer, lower prices. Weighted average still smooths the movement. Either way, check that stock isn’t carried above what you can sell it for: IAS 2 measures inventory at the lower of cost and net realisable value. ## Which costing method suits a trading company? There is no single right answer, but the questions below usually decide it. | If your business… | Consider | Why | | --------------------------------------------------------------------------------- | ----------------------- | --------------------------------------------------------------------------------- | | Buys the same items repeatedly at moving prices, and units are interchangeable | Weighted average | One cost per item; margins move gradually; simpler to explain to sales | | Sells goods with a shelf life, or wants stock valued close to recent prices | FIFO | Cost follows the order goods were bought; closing stock reflects recent purchases | | Buys at stable, agreed prices and wants to measure buying performance | Standard cost | Fixed cost per item; differences are shown as variances | | Holds unique, non-interchangeable items, such as equipment bought for one project | Specific identification | IAS 2 requires specific costs for items that are not ordinarily interchangeable | If you distribute building materials, MEP products or industrial supplies, weighted average is often the natural fit: the units are interchangeable and buyers restock the same lines all year. FIFO earns its keep where the age of stock matters, or where finance wants the balance sheet close to current prices. Whatever you choose, apply it consistently. IAS 2 requires the same cost formula for all inventories of a similar nature and use, and notes that a different location or tax regime alone doesn’t justify a different formula. ## What about standard cost? [Standard cost](https://1flux.ai/glossary/standard-cost) is a third option: you set a fixed cost per item in advance, and every receipt and sale uses it. Whenever you buy at a different price, the difference goes to a [purchase price variance](https://1flux.ai/glossary/purchase-price-variance) account instead of changing the stock value. Using the same month with a standard cost of SAR 45.00: | Receipt | Units | Actual cost | At standard | Variance (SAR) | | ------- | ----- | ----------- | ----------- | --------------- | | 3 Sep | 100 | 40.00 | 45.00 | 500 favourable | | 10 Sep | 200 | 46.00 | 45.00 | 200 adverse | | 22 Sep | 100 | 50.00 | 45.00 | 500 adverse | | **Net** | | | | **200 adverse** | Fictional example. Amounts in SAR. Cost of sales at standard is 270 × 45.00 = SAR 12,150; closing stock is 130 × 45.00 = SAR 5,850; and the SAR 200 adverse variance goes to profit or loss. Total cost charged this month: SAR 12,350, for a gross margin of 24.9%. Standard cost makes margins predictable and shows buying performance at a glance. The trade-off is upkeep. IAS 2 allows the standard cost method for convenience only if the results approximate cost, and expects standards to be reviewed regularly and revised in the light of current conditions. In a trading business where prices move every month, that review is ongoing work. ## What does IAS 2 say about costing methods? IAS 2 Inventories sets the rules for companies reporting under IFRS Accounting Standards. According to the IFRS Foundation’s jurisdiction profiles, the UAE requires companies to apply international accounting standards, and Saudi Arabia requires IFRS as endorsed by SOCPA for listed companies and the IFRS for SMEs Accounting Standard for unlisted ones. The key points of IAS 2: - **Measurement (paragraph 9):** inventories are measured at the lower of cost and net realisable value. - **Cost of purchase (paragraph 11):** purchase price, import duties and other non-recoverable taxes, transport, handling and other directly attributable costs, less trade discounts and rebates. - **Standard cost (paragraph 21):** allowed for convenience if the results approximate cost, with standards reviewed regularly. - **Specific identification (paragraph 23):** required for items that are not ordinarily interchangeable. - **FIFO or weighted average (paragraph 25):** for everything else, with the same formula for inventories of a similar nature and use. - **LIFO:** not permitted. - **Disclosure (paragraph 36):** the financial statements disclose the accounting policies used, including the cost formula. Changing from one cost formula to another is a change in accounting policy under IAS 8, normally applied retrospectively. Agree it with your auditor and make the change at a period boundary. If you report under the IFRS for SMEs Accounting Standard, its inventory section takes the same line on FIFO, weighted average and LIFO; check the detail with your auditor. ## How 1flux handles this 1flux sets the costing method per legal entity, so a company in one country and a subsidiary in another, in the same workspace, can each keep their own policy. In 1flux 1. Purchase order (No prices yet): Issued . Nothing posts. 2. Goods receipt report (GRR-2026-0081): Provisional . Posts Dr Inventory , Cr GRNI. 3. Agree prices . Nothing posts. 4. Revaluation (At receipt-date rate) . Posts Inventory adjusted. Price later, value now: goods received before the price is agreed carry a provisional cost until prices are agreed on the order. - **Three methods:** weighted average, FIFO or standard cost, chosen in each entity’s ledger policies. Under weighted average, 1flux keeps a running average per item in each warehouse. - **Standard cost with variances.** Standard costs are set per item and entity. Receipts at a different price post the difference to purchase price variance, and posting stops if an item’s standard cost is missing. - **Stock and the ledger together.** Every stock posting writes the quantity, its cost layers and a balanced journal in one step, so cost of goods sold on a delivery note comes from the same layers as the stock valuation. That keeps your stock report and your accounts in step, and a **Stock vs ledger** check on the Accounting overview flags any difference. - **Provisional costs.** Goods received before the price is agreed carry a provisional cost, so stock is valued from the day it arrives, and the cost audit report ages every receipt still waiting for a price. - **Reports with CSV export:** movements (the stock ledger), valuation, **Cost audit** (cost layers, with provisional-cost aging) and **Reconciliation** (balances against movements). [Inventory costing and valuation in 1flux](https://1flux.ai/products/inventory/costing-and-valuation) [Why stock and accounts disagree](https://1flux.ai/blog/stock-and-accounts-disagree) Related solution ### [1flux for trading and distribution](https://1flux.ai/solutions/trading-and-distribution) Quote from your catalogue, buy on purchase orders, hold stock in several warehouses and invoice on credit. FAQ ## Questions, answered Still deciding? [Talk to sales](https://1flux.ai/contact) ### What is the difference between weighted average and FIFO? Weighted average values each sale at the average cost of all units of that item on hand, recalculated as new stock arrives or once per period. FIFO values each sale at the cost of the oldest units first, so closing stock carries the most recent purchase prices. When purchase prices rise, FIFO gives lower cost of sales and higher closing stock; weighted average smooths the effect. ### Which costing method is best for a trading company? It depends on your stock and your priorities. Weighted average suits interchangeable goods bought repeatedly at changing prices, which describes a typical distributor's catalogue. FIFO suits goods where age matters or where you want stock valued near recent prices. Standard cost suits stable prices and variance analysis. Whichever you choose, apply it consistently to similar inventories and agree it with your auditor before go-live. ### Is LIFO allowed under IFRS? No. IAS 2 doesn't permit the last-in, first-out (LIFO) formula, and neither does the IFRS for SMEs Accounting Standard. Companies that report under IFRS, including most companies in the UAE and Saudi Arabia, use FIFO or weighted average for interchangeable items, specific identification for items that aren't interchangeable and standard cost only where the results approximate actual cost. ### Can we change our costing method later? Yes, but treat it as a change in accounting policy. Under IAS 8, a change of cost formula is normally applied retrospectively, with comparative figures restated unless that is impracticable. Plan the change with your auditor, make it at the start of a financial period and document why the new method gives more relevant information. Avoid switching back and forth: consistency is part of what makes the numbers trustworthy. ### Does the costing method change the total cost of my stock? No. Over the life of the stock, every method charges the same total purchase cost. The method changes timing: how much reaches cost of sales this month and how much stays in closing stock. In the worked example above, all three methods account for the same SAR 18,200. The differences in gross profit reverse as the remaining stock is sold. ### Can each company in 1flux use a different costing method? Yes. 1flux sets the costing method per legal entity: weighted average, FIFO or standard cost. Each entity keeps its own cost layers, valuation and journals, so a UAE trading company can run weighted average while its Saudi subsidiary uses FIFO. The cost audit report shows the cost layers behind every valuation, and price and exchange differences post to their own accounts. Related ## Keep exploring ### [Costing and valuation](https://1flux.ai/products/inventory/costing-and-valuation) Weighted average, FIFO or standard cost per company, with cost layers you can audit. ### [Trading and distribution](https://1flux.ai/solutions/trading-and-distribution) Quote, buy, stock, deliver and invoice in one flow, with books that post themselves. ### [Why your stock report and your accounts never agree](https://1flux.ai/blog/stock-and-accounts-disagree) The five reasons stock and the ledger drift apart, a step-by-step reconciliation and a worked template. ### [Goods received not invoiced (GRNI), explained](https://1flux.ai/blog/goods-received-not-invoiced-explained) The journals from goods receipt to supplier invoice, why the balance creeps up and a month-end routine that keeps it clean. Last updated 11 October 2026