Profit Calculation: Moving Average and FIFO

Did you know that calculating profit in a business isn’t as simple as you might think? If you buy a product for 100 baht and sell it for 200 baht, you would naturally make a profit of 100 baht. But what if you buy multiple lots of products at different costs and sell some of them? How do you calculate the profit then?

Generally, we use one of two popular profit calculation methods: Moving Average and FIFO. These are fundamental techniques for proper inventory management.

1. Moving Average

Example Scenario:

Purchase item P0001 (red shirts) in 2 lots:

Lot 1: 10 units at 1,000 baht (100 baht each)

Lot 2: 20 units at 1,400 baht (70 baht each)

This gives you 30 units in stock with a total cost of 2,400 baht. The selling price to customers is 200 baht per unit.

Using this method, you calculate the average cost per unit as:

Average Cost per Unit = (1000+1400)/(10+20) = 80 baht per unit

For example, when you sell a product for 200 baht each, you earn a profit of 200 – 80 = 120 baht per unit. Every time you sell, let’s assume you sold 20 units and have 10 units left. If you purchase additional units, you need to calculate the new average cost per unit. Suppose you buy a new batch of 50 units for 2800 baht (56 baht each). This changes the average cost per unit to ((10×80) + 2800) / (10+50) = 60 baht per unit. After that, when you sell, you will earn a profit of 200 – 60 = 140 baht per unit. That’s it!

2. FIFO (First In, First Out)

Example Scenario:

Purchase item G0001 (game consoles) in 3 Lots:

Lot 1: 2 units at 2,000 baht (1,000 baht each)

Lot 2: 1 unit at 1,200 baht (1,200 baht each)

Lot 3: 3 units at 2,700 baht (900 baht each)

This gives you 6 units in stock with a total cost of 5,900 baht. The selling price to customers is 1,500 baht per unit.

Using FIFO, you calculate profits based on the actual cost of goods sold, starting with the oldest lots first. For example:

Selling the first 2 units in Lot 1, you will get a profit of 1,500 – 1,000 = 500 baht per unit.

Selling the next unit in Lot 2, you will get a profit of 1,500 – 1,200 = 300 baht per unit.

Selling units 4 to 6 in Lot 3, you will get a profit of 1,500 – 900 = 600 baht per unit.

If you purchase additional units (e.g., Lot 4) and they are sold later, they follow the FIFO principle, awaiting sale based on the original purchase order.