Inventory valuation puts a monetary value on stock, and the value depends on which costing method is used. Odoo offers three. This piece is about the inventory valuation methods in Odoo and how to choose.
What inventory valuation is
Inventory valuation is the putting of a monetary value on the stock a business holds. Stock is an asset, and its value is part of the business's financial picture; valuation also determines the cost recognised when stock is sold or consumed. The valuation method is what determines what cost is assigned to stock, and Odoo supports three: standard cost, average cost, and first-in-first-out, known as FIFO. The method is set per product or per product category.
Standard cost
With standard cost, a product is given a fixed, predetermined cost, and stock is valued at that standard regardless of fluctuations in what was actually paid. The character of standard cost is stability and predictability: the business always knows what its stock is valued at, and the figure does not move with every price change. Differences between the standard and what was actually paid show up as variances. Standard cost suits a business that wants a stable, planned basis for its valuation and whose costs are stable enough that a standard remains meaningful. Its weakness is that, with volatile costs, the fixed standard drifts from reality until it is updated.
Average cost
With average cost, a product's cost is a running weighted average of what has been paid for it. As new stock is received at different prices, the average adjusts. The character of average cost is that it smooths fluctuations: instead of the cost jumping with every price change, it moves gradually as the average shifts. It does not need the deliberate setting and updating that standard cost requires. Average cost is a sensible, balanced default for many businesses, tracking real costs reasonably while smoothing out the noise.
First-in-first-out (FIFO)
With FIFO, the assumption is that the oldest stock is used first, and stock is valued, and cost recognised, at the actual cost of the specific units, oldest first. The character of FIFO is that it tracks actual costs closely and specifically: the cost reflects what those particular units actually cost. FIFO suits a business that wants its valuation and cost to follow real purchase costs precisely, rather than being smoothed into an average or fixed as a standard.
How to choose
The choice comes down to what the business wants from its valuation and how stable its costs are. If the business wants a stable, planned basis and has reasonably stable costs, standard cost fits. If it wants a balanced approach that tracks real costs while smoothing fluctuations, without the upkeep of standards, average cost is a sound default. If it wants valuation and cost to follow actual purchase costs closely, FIFO fits. The stability of costs is a key factor: volatile costs make a fixed standard awkward and argue toward average or FIFO. And because the method is set per product or category, a business can apply the method that suits each kind of product.
Choose deliberately, with accounting input
An honest note. The inventory valuation method affects how stock is valued and how cost of goods is recognised, which has accounting implications. A business should choose its valuation method deliberately, understanding how each behaves, and, because the choice interacts with accounting, it is sensible to make the decision with proper accounting input rather than casually. Once chosen and in use, the method shapes the value the business reports for its stock and the cost it recognises, so it is worth choosing well.
The takeaway
Odoo offers three inventory valuation methods: standard cost, fixed and stable, with variances, suiting stable costs; average cost, a smoothed running average, a balanced default; and FIFO, tracking actual purchase costs closely. Choose on what the business wants from valuation and how stable its costs are, applying the method per product or category as suits. The method has accounting implications, so choose deliberately and with accounting input. For how we approach Odoo, see our ERP practice.