Parts Inventory Valuation: When to use ACM vs LIFO vs FIFO

What is Parts Inventory Valuation?

If you’ve ever worked retail, you’ll likely be familiar with the first in, first out (FIFO) method of stocking new inventory as it arrives. After all, it’s basically the golden rule of inventory management. You may be less familiar, however, with FIFO as an inventory valuation method. Inventory valuation methods like FIFO, last in, first out (LIFO) and average cost method (ACM) help businesses more accurately assess the value of their inventory against inventory flow. Additionally, fleets stocking spare parts for maintenance and repairs can use inventory valuation methods to gain more precise service cost data for improved insight into an asset’s total cost of ownership (TCO).

Parts inventory best practices shouldn’t be limited to physical stock, but rather should incorporate the financial side of inventory management as well. Because the price of parts fluctuates based on supply and demand, it’s important to factor in those price changes over the course of the fiscal year.

When to use ACM (Average Cost Method)

ACM is a straight-forward valuation method that makes getting a better handle on your inventory finances simpler. ACM is calculated by dividing the total cost of a specific part — or unit — in inventory by the quantity of that part. Because it focuses on the average cost of parts during a set time period rather than attributing cost-at-purchase, this valuation method helps evenly distribute parts cost across assets for improved TOC data and is especially beneficial for fleets needing balanced costing across departments.

When to use FIFO (First In, First Out)

Similar to physical inventory management, FIFO valuation assumes that the first inventory in, or oldest, is used first. This is a much more common method of valuation as it mimics physical inventory flow and provides more accurate accounting and real-time analytics. If your fleet’s parts prices fluctuate throughout the year — either naturally or due to sales and purchasing discounts — the FIFO method of valuation may be the preferred method for your fleet.

When to use LIFO (Last In, First Out)

The LIFO valuation method is the least common and is only accepted in the United States, using a special tax election with the IRS. It assumes that the last or most-recent unit to arrive in inventory is used first, which can be beneficial when it comes to tax reductions provided newer inventory costs continue increasing over time. When a fleet counts its parts inventory at peak costs, profit margins are reduced, meaning lower taxable income. During prolonged times of parts cost inflation, or if your fleet tends to use more parts that continuously climb in price rather than fluctuate up and down, then LIFO may be the best valuation method for your fleet.

Inventory Valuation in FMS

To help with spare parts management, including valuation, fleets can use parts inventory software to streamline inventory data capture and automate the inventory management process. When managing inventory in fleet management software (FMS), fleets can set their preferred valuation method so that as parts are ordered and assigned to work orders, accurate costing data is captured and attributed accordingly. Fleets can also use an FMS’s native parts inventory app to quickly adjust inventory counts and pricing. Fleet managers can easily assess inventory value and flow using configurable fleet management reports, such as parts by vehicle, parts by location (for fleets with multiple depots), parts activity and purchase orders.

Using inventory valuation in Fleetio accurately attributes the cost of parts to specific assets, providing a comprehensive view of TCO, including changes in parts prices over time. Using digital work orders, technicians can automatically record the cost of parts used based on the fleet's set inventory valuation method. By providing a more accurate picture of the costs associated with repairs, fleets can better assess the TCO of assets and gain better insights into which parts and repairs are more costly.

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