FIFO (First-In, First-Out) is the Costing Method in which oldest units in inventory are the first ones consumed or sold. In Business Central, this is not just an assumption, it is an actual cost flow. The system tracks every purchase receipt as its own cost layer and, when an outbound transaction occurs, applies it against the Earliest Inbound Value by Posting Date.
Because FIFO follows traceable receipt costs rather than an estimate, it is classified as an actual costing method in Business Central, alongside LIFO, Specific, and Average.
Watch this Video to understand in more detail – https://youtu.be/fq5MxVVBXa8
Common Misconception
Regardless of which Costing Method is assigned to an item, the Unit Cost field on the Item Card is always populated by an average calculation the total remaining cost of on-hand inventory divided by the remaining quantity.
Costing Method Field
FIFO is set on the Item Card under Replenishment / Costing Method. It cannot normally be changed once transactions exist for the item, since doing so would break the cost layer logic already recorded.
Worked Example
Consider Item “ITEM”, a stackable chair, costed under FIFO. Three purchase receipts occur before a sales order ships 130 units.
| Transaction | Date | Quantity | Unit Cost | Total Cost |
| Purchase Receipt # 1 | 1-Sep | 50.00 | 40.00 | 2,000.00 |
| Purchase Receipt # 2 | 5-Sep | 60.00 | 42.00 | 2,520.00 |
| Purchase Receipt # 3 | 10-Sep | 40.00 | 45.00 | 1,800.00 |
| Sales Shipment # 1 | 15-Sep | 130.00 | (Applied FIFO) | |
Business Central applies the 130 Unit Shipment Against the Oldest Layers First:
- 50 units @ 40.00 from Receipt #1 = 2,000.00
- 60 units @ 42.00 from Receipt #2 = 2,520.00
- 20 units @ 45.00 from Receipt #3 = 900.00
Total COGS posted for this shipment = 2,000.00 + 2,520.00 + 900.00 = 5,420.00 (actual weighted result of 41.69 per unit for this shipment specifically).
Receipt #3 still has 20 units open at 45.00, ready to be consumed by the next outbound transaction.
When to Use This Method
- Perishable, date-sensitive, or fashion/seasonal goods where older stock should logically move first
- Businesses wanting COGS to reflect actual purchase history in Chronological Order.
In Business Central
Let’s go the Item card first.
Now let’s Purchase this Item in a way we do normal Purchases.
Refer this document to learn the Procure to Pay Process in detail – https://ahmad365.com/procure-to-pay-process/
I have created the Example I explained above and in Business Central you can see the Details.
Now let’s Sell 130.00 Quantities.
As you can observe that Unit Cost is 42.13 Per Item, which you can see in the Unit Cost field on item card, and it is calculated based on AVCO even though we selected FIFO. But this field is just for Reporting Purpose. Actual Entries will follow the Costing Method you will select in the Item Card.
Let’s Preview this Sales Order:
Cost Amount (Actual) – 5,420.00
| Transaction | Quantity | Unit Cost | Total Cost |
| AVCO Calculation | |||
| Sales Shipment # 1 | 130.00 | 42.13 | 5,476.90 |
| Total Amount (AVCO) | 5,476.90 | ||
| FIFO Calculation | |||
| Purchase Receipt # 1 | 50.00 | 40.00 | 2,000.00 |
| Purchase Receipt # 2 | 60.00 | 42.00 | 2,520.00 |
| Purchase Receipt # 3 | 20.00 | 45.00 | 900.00 |
| Total Amount (FIFO) | 5,420.00 | ||
Check the GL Entry closely that Amount is coming according to AVCO.
- Cost of Retail Sold – 5,476.90 (Debit)
- Resale Items – 5,476.90 (Credit)
But look closely check the entries of 56.90 Amount. So, in Practical system record the value in FIFO after adjusting the entry of difference in AVCO and FIFO.
- Cost of Retail Sold – 5476.90 (Debit) + 56.90 (Credit) = 5420.00 (Debit)
- Resale Items – 5476.90 (Credit) + 56.90 (Debit) = 5420.00 (Credit)
So, In short this is how it works.