Any company handling physical products depends first on inventory control. In India, where businesses including manufacturing, retail, FMCG, and textiles flourish, selecting the appropriate inventory valuation technique can have a big effect on compliance, financial situation, and tax obligations. Within the Indian setting, this blog examines three main techniques—FIFO, LIFO, and Weighted Average Cost (WAC)—highlighting their importance, regulatory consequences, and practical uses.

Why Inventory Valuation Matters in India

Accurate inventory valuation ensures precise financial reporting, aids in tax compliance, and enhances decision-making. For Indian businesses, this is crucial due to:

  1. Taxation: Profit margins are directly affected by inventory costs, so under the Income Tax Act corporate tax is influenced.
  2. Regulatory Compliance: Ind AS, or Indian Accounting Standards, provide for certain valuation techniques.
  3. Operational Efficiency: Particularly in industries like agriculture and pharmaceuticals with perishable items, proper value helps control expenses.

Adoption of Ind AS (aligned with IFRS) in 2016 forces Indian companies to follow set procedures, hence knowledge of these approaches is rather important.

FIFO (First-In, First-Out): The Go-To Method for Perishables
What is FIFO?

FIFO sells first the oldest inventory. While leftover inventory is valued at recent pricing, the cost of goods sold (COGS) reflects prior acquisitions.

Example: Imagine DesiGrocers, a Mumbai-based supermarket. They stock rice bags monthly at varying prices (₹50/kg in January, ₹55/kg in February). Under FIFO, January’s cheaper rice is recorded as COGS when sold in March, leaving February’s cost in inventory.

Pros:

  • Matches physical flow of perishables (e.g., dairy, vegetables).
  • Greater ending inventory value during inflation will strengthen balance sheets.

Cons:

  • Higher taxable income in inflationary periods (older, cheaper COGS = lower expenses).

Indian Applicability:

  • FMCG & Pharma: Companies like Amul use FIFO to manage expiry dates.
  • Tax Impact: During rising prices, profits (and taxes) increase.
LIFO (Last-In, First-Out): A Relic of the Past

What is LIFO?
LIFO assumes the newest inventory is sold first. COGS reflects recent prices, while older costs remain in inventory.

Example: If Bharat Steel bought raw material at ₹100/unit in January and ₹120/unit in February, LIFO would assign ₹120/unit to COGS in March.

Pros:

  • Lowers taxable income in inflation; increased COGS lower profits.

Cons:

  • Distorts inventory value on balance sheets.
  • Not Compliant with Ind AS: Ind AS 2 prohibits LIFO, aligning India with global standards.

Indian Context:
LIFO is obsolete in India post-Ind AS implementation. Historically, some firms used it for tax benefits, but compliance now mandates FIFO or WAC.

 

Weighted Average Cost (WAC): Simplifying Complexity
What is WAC?

WAC calculates an average cost per unit after each purchase, smoothing out price fluctuations.

Example: Surya Textiles buys cotton at ₹100/kg (100kg) and ₹120/kg (200kg). The average cost becomes ₹113/kg. All sales and inventory are valued at this rate.

Pros:

  • Reduces volatility in sectors like raw materials with regular price fluctuations.
  • Makes homogenous goods’ accounting easier.

Cons:

  • Less precise for tracking specific batch costs.

Indian Applicability:

  • Manufacturing & Commodities: Firms like JSW Steel use WAC for bulk raw materials.
  • GST Era: Simplifies input tax credit tracking by averaging costs.

 

Choosing the Right Method in India

  1. Industry Needs:
    • FIFO: Ideal for perishables (food, pharma).
    • WAC: Suitable for bulk goods (cement, textiles).
  2. Tax Strategy:
    • FIFO may increase tax liability during inflation.
    • WAC offers balanced tax outcomes.
  3. Regulatory Compliance:
    • Ind AS and GST necessitate transparent, standardized practices.
  4. Business Size:
    • SMEs may prefer WAC for simplicity, while larger firms use FIFO for accuracy.
Questions to Understand your Ability

Q1.) Why does inventory valuation even matter for Indian businesses?

A) Just for keeping stock records tidy
B) It directly impacts profits, taxes, and financial reporting
C) Only big companies need to bother with it
D) It helps reduce storage costs significantly

Q2.) In a world of rising prices, which method makes your balance sheet look stronger but also pushes up your tax bill?

A) LIFO – because it dumps expensive inventory into COGS
B) FIFO – because it leaves costlier inventory on the books
C) WAC – because it levels out price swings
D) None – inventory valuation doesn’t affect taxes

Q3.) If a business is dealing with fast-moving perishables like milk or medicine, which method makes the most sense?

A) LIFO – because selling new stock first is always smart
B) FIFO – because older stock gets cleared out before expiry
C) WAC – because averaging prices works for everything
D) None – perishables don’t need inventory valuation

Q4.) LIFO isn’t an option in India. Why?

A) It’s too confusing for accountants
B) Ind AS 2 straight-up bans it for financial reporting
C) It’s a global standard, and India loves being different
D) Indian tax laws don’t recognize inventory methods at all

Q5.) A steel manufacturer buys raw materials at ₹100/kg in January and ₹120/kg in February. If they sell some stock in March using WAC, what happens?

A) They’ll sell at ₹110/kg, smoothing out price jumps
B) They’ll take a hit and sell at ₹100/kg
C) The latest price of ₹120/kg will be used for valuation
D) None of these – WAC doesn’t apply to manufacturing

Conclusion

In India, FIFO and WAC dominate inventory valuation, with LIFO phased out due to Ind AS. Businesses must align their choice with operational needs, regulatory demands, and financial strategies. As India’s market evolves, leveraging digital tools for inventory management can streamline compliance and enhance efficiency. Whether you’re a startup or an established enterprise, understanding these methods ensures smarter financial decisions in a dynamic economy.

By adopting FIFO or WAC, Indian businesses can navigate inflation, comply with standards, and optimize profitability—key steps toward sustainable growth in the world’s fifth-largest economy.

FAQ's

Because it decides profits, taxes, and how strong your balance sheet looks. Mess it up, and your financials take a hit.

FIFO and WAC. LIFO? Forget it. Ind AS 2 kicked it out.

Because old stock sells first. Nobody wants expired milk or rotten veggies sitting around.

Because Ind AS 2 banned it. It messes with inventory values and doesn’t match how businesses actually sell stuff.

Your tax bill goes up. Older, cheaper inventory gets recorded as COGS, profits look bigger, and the taxman takes a bigger cut.

It evens out price jumps, making accounting simpler for stuff like cement, steel, and textiles. No wild swings in inventory costs.

SMEs stick with WAC because it’s easy. Bigger companies juggling perishables or high-value stock go for FIFO.

WAC makes GST tracking easier. No need to chase fluctuating costs—just average it out and move on.