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Rachael Plant

Rachael Plant

Feb 6, 2023

4 minute read

Fleet Management Blog

Inventory Valuation Methods Improve Parts Cost Tracking

Fleetio has added two parts inventory valuation methods to its platform: last in, first out (LIFO) and first in, first out (FIFO). These methods provide better inventory cost tracking associated with fluctuating parts costs and allow fleets to appropriately assign those costs to work done on specific assets for improved true total cost of ownership data.

Improve total cost analysis with parts valuation

Pain Points in Inventory Cost Tracking

Inventory management encompasses everything from initial parts purchasing and on-hand counts tracking to usage, replenishment and cost management. Because prices fluctuate over time, it can be difficult to ensure that you’re applying accurate parts costings to services performed. Incorrect parts cost data can throw off a fleet asset’s total cost of ownership and lead to inaccuracies in parts inventory value.

As fleets continue purchasing parts to replenish used stock, it can be hard to keep track of and account for price increases and reductions. While one potential solution is to average out parts costs over a certain time period and divide the total between assets on which the parts were used, that’s … not very efficient.

Using fleet management technology with a spare parts management feature allows fleets to choose their preferred valuation method — in Fleetio’s case, LIFO or FIFO — to improve inventory management and capture accurate cost data. While we can’t speak for all parts inventory software, using LIFO or FIFO in Fleetio helps fleets accurately account for parts inventory used or stored for repairs and provides visibility into the full cost of in-house maintenance.

Inventory Valuation Methods in Fleetio

LIFO and FIFO inventory valuation in Fleetio makes keeping up with parts costs — and assigning appropriate costs to work orders — manageable through the power of automation. Basically, just set the method that fits best with your organization’s accounting goals and needs, and everything after falls into place. Inventory sets are automatically created from parts purchase orders. When parts are added to digital work orders, Fleetio automatically assigns the appropriate costing based on the valuation method you’ve set, allowing you to easily and accurately track service cost. Likewise, the parts record will automatically be updated based on the valuation method set.

When you set a valuation method in Fleetio, you gain high-overview metrics such as total value of current inventory and average cost of parts across all purchases. You can track parts use and associated costs in real time with such fleet management reports as work order summary by vehicle, parts by vehicle, purchase orders list and more. Reports are configurable, so you can quickly and easily surface the data that matters the most for improved inventory management and cost control. But exactly what is LIFO vs. FIFO, and how do these valuation methods work?

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LIFO and FIFO 101

Using LIFO or FIFO, fleets can attribute the appropriate cost of parts to specific assets, providing a full view of TCO, including fluctuations in TCO over time as prices and parts availability change. Furthermore, technicians can more accurately account for service costs on work orders based on the price of the part at the time of purchase. These valuation methods provide more accurate parts costing data per work order and can improve management around tax liability or inventory valuation according to the strategic needs and accounting practices of your organization.

LIFO

The LIFO valuation method assumes that the last or most-recent unit to arrive in inventory is used first. Using inventory sets — that is, grouping parts based on type and procurement date — helps ensure this accounting process is followed. The biggest potential benefit to the LIFO method is tax reduction. When an organization counts its fleet parts inventory at peak costs, profit margins are reduced, meaning lower taxable income. This is a particularly good method of choice during extended times of continuous price inflation. LIFO is only an acceptable inventory valuation method in the United States and is the least common method used. If your fleet decides to follow the LIFO inventory valuation method, you are also required to file this election with the IRS.

FIFO

The more common valuation method, FIFO, assumes that the first unit added to inventory (i.e. the oldest inventory) is used first. Typically, the most recently ordered parts will be more expensive due to price increases — although this is not always the case — so using the older parts first will increase an organization’s profit margins, leading to increased taxable income and higher inventory valuation. Fleets can benefit from FIFO due to the method providing a more accurate alignment of expenses versus the flow of inventory. This method also allows for better accounting and real-time analytics.


Want to see LIFO and FIFO in action in Fleetio? Start your free trial or schedule a personalized walkthrough today!

About the Author

Rachael Plant
Rachael Plant

Content Marketing Specialist

Rachael Plant is a Content Marketing Specialist at Fleetio whose automotive background spans from managing auto parts inventories to overseeing fleet-specific editorial in national trade publications. She resides deep in the middle-of-nowhere Alabama with her two dogs and, thankfully, reliable GPS.

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