FIFO vs. Average Cost in QuickBooks Enterprise: How to Choose the Right Inventory Valuation Method

When two businesses have identical sales, expenses, and inventory purchases-but use different inventory valuation methods-their financial statements can look completely different. That's because the method you choose to track inventory cost directly impacts your profit, taxes, and inventory valuation.

QuickBooks Enterprise gives you two primary costing methods: Average Cost and FIFO (First-In, First-Out). Most Enterprise users already use Average Cost by default, but it isn't always the best option, especially if your inventory costs fluctuate throughout the year.

In this guide, you'll learn how each method works, how to enable FIFO in QuickBooks Enterprise, and how the right choice can dramatically change your financial accuracy.

What Is the Average Cost in QuickBooks Enterprise?

Average Cost smooths out price fluctuations by calculating a weighted average cost per unit across all your purchases.

How It Works

• Every time you purchase inventory, QuickBooks recalculates the average cost.
• All sales transactions pull from this updated average value.
• This method keeps your cost of goods sold (COGS) steady, even if supplier prices swing dramatically.

When Average Cost Makes Sense

• When purchase prices stay relatively stable.
• When simplicity is more important than precision.
• When you want predictable COGS on financial reports.

What Is FIFO (First-In, First-Out)?

FIFO assumes the oldest items you purchased are the first ones you sell.

How FIFO Works

• QuickBooks applies the cost of your earliest inventory purchases to your next sales.
• This results in more accurate margin calculations when prices fluctuate.
• FIFO aligns more closely with physical inventory movements in many industries.

When FIFO Is the Better Choice

• When supplier pricing changes frequently.
• When you require more accurate cost tracking for reporting.
• When you need tighter control over margin analysis.

FIFO vs. Average Cost: How Each Impacts Your Business

1. Profit Reporting

• Rising prices → FIFO increases COGS (older, cheaper inventory gets sold first), lowering your profit.
• Average Cost blends costs, which can raise or lower margins depending on fluctuations.

2. Taxes

• Because profits change, tax liabilities change as well.
• Some industries prefer FIFO for regulatory or audit reasons-always confirm with your accountant.

3. Inventory Valuation

• FIFO gives you a more realistic, current value of remaining inventory.
• Average Cost may overvalue or undervalue inventory if prices move drastically.

How to Enable FIFO in QuickBooks Enterprise

You can only use FIFO if you have Advanced Inventory enabled.

Step-by-Step Instructions

1. Open QuickBooks Enterprise.
2. Go to Edit → Preferences.
3. Select Items & Inventory.
4. Go to Company Preferences.
5. Enable Advanced Inventory (if not already active).
6. Select the checkbox to switch from Average Cost to FIFO.
7. Confirm your selection and click OK.
8. Review the Inventory Valuation Summary report to confirm new cost flows.

Important: FIFO changes your accounting going forward. You cannot reverse this without impacting financial history, so consult your accountant before switching.

Which Method Should You Choose?

Here's a quick guide:

Final Thoughts

Choosing between FIFO and Average Cost is more than just an accounting preference-it's a strategic decision that determines how accurately you track inventory costs and measure profitability.

If you're ready to optimize your QuickBooks Enterprise setup and fully understand your costing method, Minding My Books can help you fine-tune your accounting configuration so your financial reports always tell the right story.