Discover why not every inventory method fits every business. Sort methods to business contexts and establish the key distinction between traceable items and pooled costs.
Not Every Method Fits Every Business
You've learned FIFO and LIFO. Now you'll discover two more methods — but first, an important question: When should you use each one?
In Lessons 2 and 3, you learned FIFO and LIFO — two methods that assume inventory flows in a certain order, even if that's not physically what happened.
FIFO (First-In, First-Out)
Assumes the oldest items sell first. Works well when physical flow matches this pattern (perishable goods, organized shelving).
LIFO (Last-In, First-Out)
Assumes the newest items sell first. Often used for tax planning when costs are rising (U.S. only, not IFRS-compliant).
Key insight: FIFO and LIFO are assumptions. They don't require tracking individual items — they assume a flow pattern and calculate costs accordingly.
What if you can track individual items? What if you can't tell items apart at all?
You CAN track each item
Cars have VINs. Jewelry has certificates. Custom computers have serial numbers.
Use: Specific Identification
Track the exact cost of each individual item.
You CAN'T tell items apart
Grain in a silo. Gas in a tank. Nails in a bin. All units look identical.
Use: Weighted Average
Blend all costs into one average price per unit.
For each business below, select the inventory method that best fits. Think about whether items are unique/trackable or identical/pooled.
Luxe Jewelry Boutique
A high-end jewelry store selling one-of-a-kind diamond necklaces, engagement rings, and designer watches. Each piece is unique with its own appraisal certificate and serial number.
Inventory type: Unique, expensive items with individual certificates
Premier Auto Sales
A car dealership selling new and certified pre-owned vehicles. Each car has a unique VIN number, mileage, and purchase cost. Inventory ranges from $25,000 economy cars to $85,000 luxury models.
Inventory type: Unique vehicles with VIN numbers and individual costs
CustomTech Solutions
A custom computer builder who assembles each machine individually for clients. Some builds use premium components while others use standard parts. Each computer is a unique project with tracked costs.
Inventory type: Custom-built systems with varying component costs
Valley Bulk Foods
A wholesale grocery supplier selling rice, flour, sugar, and cooking oil in bulk. They receive multiple shipments per month at different prices, but the products are physically identical.
Inventory type: Identical bulk products that can't be distinguished by shelf
Discussion Prompt (3 minutes):
- Why wouldn't a jewelry store use weighted average for their inventory?
- Why wouldn't a bulk grain supplier use specific identification?
- What would happen if you tried to apply FIFO to custom-built computers where each one has different components?
Key insight: The "best" method depends on the physical nature of your inventory and whether you can track individual items. No method is universally better — each has a proper use case.
1. A car dealership sells vehicles with unique VIN numbers. Which inventory method is most appropriate?
2. A gas station receives multiple fuel deliveries at different prices each month. The fuel all goes into the same tank and can't be distinguished. Which method makes the most sense?
3. Why does specific identification NOT work for bulk commodities like wheat or rice?
4. Sarah from TechStart offers custom website packages. Each client project has different requirements and costs. Which method fits best?
You've just learned when to use each method. In the next phases, you'll learn how to calculate them.
Phase 2: I Do
Watch a step-by-step example of Specific Identification with a small inventory of tagged, unique items.
Phase 3: We Do
Work through a Weighted Average calculation together with visible running totals and explicit rounding rules.
Remember: Today is about understanding the methods. Excel workbook construction comes in Lesson 5.