TL;DR
Valuation methods
Valuation modes
Setup time
- FIFO values inventory at the cost of oldest purchases
- AVCO uses weighted average cost across all stock
- Choice affects profit margins and tax calculations
Choosing the right inventory valuation method is one of the most consequential decisions in an Odoo implementation. The method you select determines how product costs flow through your financial statements, directly impacting gross margin, tax liability, and inventory asset values on the balance sheet. Switch methods after transactions exist, and Odoo will not allow it.
This guide compares FIFO, AVCO, and Standard Price methods in Odoo, explains when to use each one, and walks through the complete configuration with accounting integration.
What Is Inventory Valuation?
Inventory valuation assigns a monetary value to the stock you hold. When you purchase goods at different prices over time, Odoo needs a rule to determine which cost to assign when items leave the warehouse.
Consider this scenario:
- January: Buy 100 units at $10 each
- February: Buy 100 units at $12 each
- March: Sell 150 units at $20 each
The cost of those 150 sold units depends on your valuation method. Under FIFO, the cost is $10 for the first 100 and $12 for the next 50, totaling $1,600. Under AVCO, the average cost is $11 per unit, totaling $1,650. The $50 difference directly affects your reported profit.
Standard Price: Simple but Limited
Standard Price is the default method in Odoo. It assigns a fixed cost to the product, regardless of actual purchase prices. You set the cost manually, and it stays constant until you change it.
When to use it: Products with stable costs, internal transfers, or when purchase price variation is negligible.
Limitations: Standard Price does not track actual purchase costs. Price differences between purchase orders create variance entries that must be reconciled manually. For businesses with fluctuating supplier prices, Standard Price produces misleading margin reports.
To configure Standard Price, set the Costing Method to "Standard Price" on the product form. The cost field is editable and must be updated manually when supplier prices change.
FIFO: First In, First Out
FIFO assumes the oldest inventory items are sold first. The cost of goods sold reflects the actual purchase prices in chronological order, and remaining inventory is valued at the most recent purchase costs.
When to use it: Perishable goods, products with expiration dates, or businesses that physically rotate stock by age. FIFO also matches the actual flow of goods in most warehouses.
Financial impact: In periods of rising prices, FIFO produces lower cost of goods sold and higher reported profits. This means higher tax liability but also higher apparent profitability.
Odoo tracks each stock layer separately under FIFO. When you receive goods, Odoo creates a new layer with the purchase cost. When you deliver goods, Odoo consumes the oldest layers first. You can view stock layers on the product form under the Inventory tab.
Configuration steps:
- Enable automated valuation: Go to Inventory, Configuration, Settings, and enable "Inventory Valuation"
- Set cost method: On the product form, set Costing Method to "First In, First Out (FIFO)"
- Set valuation mode: Choose "Automated" for real-time accounting entries or "Manual" for periodic valuation
- Configure accounts: Set the Stock Valuation Account, Stock Journal, and expense/revenue accounts on the product category
AVCO: Average Cost
Average Cost (AVCO) recalculates the unit cost after every incoming transaction. The new average is the total value of all stock divided by the total quantity. This method smooths out price fluctuations and produces consistent margin percentages.
When to use it: Bulk commodities, interchangeable items, or when individual stock layers do not matter. Common in industries like chemicals, grains, and raw materials.
Financial impact: AVCO produces cost figures between FIFO and LIFO extremes. In rising price environments, AVCO yields higher cost of goods sold than FIFO and lower reported profits.
Odoo recalculates the average cost formula:
New Average Cost = (Current Stock Value + New Receipt Value) / (Current Quantity + New Quantity)
The average cost updates automatically with each purchase receipt. Manual stock adjustments also trigger a recalculation based on the adjusted total value.
Configuration is identical to FIFO except for selecting "Average Cost (AVCO)" as the Costing Method.
Automated vs Manual Valuation
Beyond the costing method, Odoo offers two valuation modes that control when accounting entries are created:
Automated Valuation creates accounting entries in real time. Every stock move (receipt, delivery, internal transfer) generates journal entries that update your stock valuation account. This gives you an up-to-date inventory asset value on the balance sheet at any moment.
Manual Valuation requires periodic inventory valuation runs. Stock moves do not create accounting entries. Instead, you run the valuation report at month-end and create journal entries manually. This is simpler but means your balance sheet only reflects inventory value at the last valuation date.
Recommendation: Use automated valuation for companies that need real-time financial visibility. Use manual valuation for smaller operations or when the accounting team prefers batch processing.
Configuring Product Categories for Valuation
Product categories control the accounting accounts used for valuation entries. Proper configuration is essential for automated valuation to work correctly.
- Go to Inventory, Configuration, Product Categories
- Open or create a category
- Set Inventory Valuation to "Automated" or "Manual"
- Set Costing Method to FIFO, AVCO, or Standard Price
- Configure accounts:
- Stock Valuation Account: Asset account on the balance sheet
- Stock Journal: Journal for valuation entries
- Stock Input Account: Temporary account for goods received not yet invoiced
- Stock Output Account: Account for cost of goods sold
- Save
Products inherit these settings from their category. You can override on individual products, but category-level configuration is recommended for consistency.
Warning: Changing the costing method on a product category does not affect existing products that have already been assigned a method. You must update each product individually if needed.
Comparing Valuation Methods
Here is a practical comparison using the earlier example (100 units at $10, 100 units at $12, sell 150 at $20):
| Method | COGS (150 units) | Revenue | Gross Profit | Remaining Stock |
|---|---|---|---|---|
| FIFO | $1,600 | $3,000 | $1,400 | $600 (50 x $12) |
| AVCO | $1,650 | $3,000 | $1,350 | $550 (50 x $11) |
| Standard ($10) | $1,500 | $3,000 | $1,500 | $500 (50 x $10) |
The choice of method shifts profit by $50 to $150 in this simple example. Across thousands of products and transactions, the cumulative impact can be substantial.
Key Takeaways
- FIFO: Best for perishable goods and businesses that rotate stock
- AVCO: Best for commodities and interchangeable items
- Standard: Best for stable-cost products and simplicity
- Automated: Real-time accounting entries, recommended for most businesses
- Cannot change: Once transactions exist, you cannot switch the costing method
- Test first: Set up a test database and run scenarios before committing to a method
Frequently Asked Questions
Can I change the valuation method after transactions exist?
No. Odoo does not allow changing the costing method on a product that has existing stock moves. You must create a new product and transfer remaining stock to it.
Which valuation method should I choose for my business?
Choose FIFO if you sell perishable goods or rotate stock by age. Choose AVCO for bulk commodities or interchangeable items. Choose Standard Price for products with stable costs. Consult your accountant for tax and regulatory requirements.
What is the difference between automated and manual valuation?
Automated valuation creates real-time accounting entries for every stock move. Manual valuation requires periodic runs to generate journal entries. Automated gives you up-to-date balance sheet values.
How does Odoo track FIFO stock layers?
Odoo creates a stock valuation layer for each incoming transaction, recording the quantity and unit cost. When goods are delivered, Odoo consumes the oldest layers first and updates the layer quantities accordingly.
Does the valuation method affect sales prices?
No. The valuation method only affects cost of goods sold and inventory asset values. Sales prices are set independently through pricelists. However, the method does affect reported gross margins.
Master Odoo Inventory and Accounting
Explore our complete library of Odoo inventory, valuation, and accounting guides for implementers and end users.