Stock Valuation Methods in India: FIFO, Weighted Average and What AS 2 Requires
By Vidya Kathare
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In India, the two permitted stock valuation methods under AS 2 (Accounting Standard 2) and Ind AS 2 are FIFO (First In, First Out) and Weighted Average Cost. LIFO (Last In, First Out) is explicitly NOT permitted under Indian accounting standards. The method you choose affects your closing stock value, cost of goods sold, and reported profit — especially when raw material prices are rising.
- Stock Valuation
- Putting a monetary value on the inventory you hold, for accounts and decision-making.
- FIFO (First In, First Out)
- Assumes the oldest stock is used first; closing stock is valued at the most recent prices.
- Weighted Average Cost
- Values all units at the average cost of stock on hand, smoothing price changes.
- AS 2 / Ind AS 2
- The Indian accounting standard on Valuation of Inventories - permits FIFO and weighted average, disallows LIFO.
- Cost of Goods Sold (COGS)
- The cost of the stock consumed or sold in a period - the figure valuation method directly affects.
What Indian Accounting Standards Say About Stock Valuation
This is the India-specific fact that generic, foreign-built tools often miss: under AS 2 and Ind AS 2 (Valuation of Inventories), only FIFO and Weighted Average Cost are permitted. LIFO is not allowed. So whatever your software can technically calculate, your statutory accounts must be valued on FIFO or weighted average — pick one and apply it consistently. For the picking-strategy side of FIFO/FEFO/LIFO (which is about physical movement, not valuation), see our FIFO vs FEFO vs LIFO picking strategies guide.
FIFO vs Weighted Average: How Each Method Works
Take a single raw material — say a steel rod — bought in three lots at rising prices:
| Purchase | Qty | Rate | Total |
|---|---|---|---|
| Lot 1 | 100 | ₹50 | ₹5,000 |
| Lot 2 | 100 | ₹55 | ₹5,500 |
| Lot 3 | 100 | ₹60 | ₹6,000 |
| Total | 300 | — | ₹16,500 |
Now consume 150 units. Under FIFO, you use the oldest stock first: 100 units at ₹50 plus 50 units at ₹55 = ₹7,750 cost of goods sold, leaving closing stock of ₹8,750. Under weighted average, the average rate is ₹16,500 ÷ 300 = ₹55, so 150 units cost 150 × ₹55 = ₹8,250, leaving closing stock of ₹8,250.
| Method | COGS (150 units consumed) | Closing stock (150 units) |
|---|---|---|
| FIFO | ₹7,750 (100×₹50 + 50×₹55) | ₹8,750 |
| Weighted average | ₹8,250 (150×₹55) | ₹8,250 |
How Each Method Affects Your Profit and Tax
The pattern is consistent: when prices rise, FIFO gives a lower COGS → higher profit → higher tax (as the ₹7,750 vs ₹8,250 above shows). When prices fall, FIFO gives a higher COGS → lower profit. Weighted average smooths out the fluctuations either way. Choosing a method is an accounting decision you should make with your CA — this article explains the mechanics, not tax advice.
Which Method Do Most Indian Manufacturers Use?
Weighted average is more common in Indian manufacturing — it is simpler to maintain, especially at high transaction volumes where tracking individual lots for valuation is heavy. FIFO is more common in pharma and food, where physical lot tracking is already in place for expiry control and aligns naturally with FIFO valuation. If you run a Bill of Materials, accurate raw-material valuation also feeds your costing.
How Fast Inventory Handles Stock Valuation
Fast Inventory (by Fast Technology) produces a Stock Valuation Report showing item, UOM, stock quantity, rate, amount and total inventory value — on demand, instead of a month-end spreadsheet exercise. Because raw materials are received and consumed in FIFO / lot sequence with full lot traceability, stock costs flow on a FIFO basis, and the valuation report reflects current quantity and rate per item. Confirm the exact valuation basis for your books with your team during a demo, and pair it with manufacturing inventory software for end-to-end stock control.
Frequently asked questions
Which stock valuation method is required in India?
Indian accounting standards AS 2 and Ind AS 2 permit FIFO (First In, First Out) and Weighted Average Cost for valuing inventory. You choose one and apply it consistently. LIFO is not permitted.
Is LIFO allowed in India?
No. LIFO (Last In, First Out) is explicitly not permitted for inventory valuation under Indian accounting standards AS 2 and Ind AS 2. Indian businesses value stock on FIFO or weighted average.
What is the difference between FIFO and weighted average stock valuation?
FIFO assumes the oldest stock is consumed first, so closing stock is valued at the most recent purchase prices. Weighted average values all units at the average cost of stock on hand. FIFO tracks price changes more closely; weighted average smooths them out.
How does FIFO affect profit when material prices are rising?
When prices rise, FIFO charges the older, cheaper costs to cost of goods sold, giving a lower COGS and therefore a higher reported profit - and higher tax - than weighted average. When prices fall, the effect reverses.
Can inventory software calculate stock valuation automatically?
Yes. Inventory software maintains quantity and rate for every item and produces a stock valuation report - item, UOM, quantity, rate, amount and total inventory value - on demand, so you are not valuing stock by hand in a spreadsheet at month-end.