Restaurant Inventory Costing Methods: FIFO vs Weighted Average Explained
Last updated: July 25, 2026 · Reviewed by the MenuPricer Team
When you buy chicken at $3.50/lb one week and $4.00/lb the next, which cost goes into your recipes? The answer depends on your inventory costing method — and it directly affects your reported food cost percentage. Here is what FIFO and weighted average mean in practice, and which one most restaurants should use.
The Two Main Inventory Costing Methods
Method 1
FIFO
First In, First Out
The oldest inventory you purchased is assumed to be consumed first. Your cost of goods sold reflects older purchase prices; your remaining inventory reflects the most recent prices.
Method 2
WAC
Weighted Average Cost
All purchase prices are blended into a single average cost per unit. Every recipe or sale draws from that same blended cost, regardless of when inventory was purchased.
Worked Example: Chicken Breast
You buy chicken breast twice in one week:
Monday delivery
20 lbs at $3.50/lb = $70.00
Thursday delivery
20 lbs at $4.00/lb = $80.00
You use 25 lbs for recipes this week. Here is how each method calculates the cost:
FIFO Method
First 20 lbs from Monday: 20 × $3.50 = $70.00
Next 5 lbs from Thursday: 5 × $4.00 = $20.00
Total COGS: $90.00
Cost per lb: $3.60
Remaining inventory: 15 lbs at $4.00
Weighted Average Method
Total cost: ($70 + $80) = $150.00
Total units: 40 lbs
Average: $150 ÷ 40 = $3.75/lb
25 lbs × $3.75 = $93.75
Total COGS: $93.75
Cost per lb: $3.75
Remaining inventory: 15 lbs at $3.75
With rising prices, FIFO produces a lower COGS ($90 vs $93.75) and therefore a lower food cost percentage. With falling prices, the relationship reverses.
FIFO vs Weighted Average: Side-by-Side Comparison
| Feature | FIFO | Weighted Average |
|---|---|---|
| How it works | Oldest stock used first | All stock averaged by quantity |
| Complexity | Higher — must track purchase layers | Lower — single average price |
| Food cost when prices rise | Lower (older cheap stock expensed) | Moderate (blended price) |
| Food cost when prices fall | Higher (older expensive stock first) | Moderate (blended price) |
| Inventory value on balance sheet | More current (newer prices) | Smoothed average |
| Best for | High-turnover, stable-price items | Most restaurant operations |
| Physical stock rotation | Mirrors physical FIFO rotation | Independent of physical flow |
Which Method Should Your Restaurant Use?
Use FIFO if:
- You physically rotate stock (older product always used before newer)
- Your ingredient prices are relatively stable with few weekly swings
- You want the most accurate current balance sheet inventory value
- Your bookkeeper or accountant specifically recommends it for your situation
Use Weighted Average if:
- Your ingredient prices fluctuate week-to-week (produce, proteins, seafood)
- You want stable, comparable food cost percentages week over week
- Simplicity of calculation matters — one average price vs. managing layers
- You use restaurant management software that defaults to WAC
For most independent restaurants, weighted average cost is the better choice because it is simpler and provides more consistent food cost readings in a market with fluctuating prices. The most important thing is to pick one method and stick with it — changing methods mid-year makes your financial comparisons meaningless.
Inventory Costing and Menu Pricing
Regardless of which inventory costing method you use, your menu prices should be based on your expected ingredient cost at the time of pricing — not a historical average. Here is why:
Inventory costing = for the books
How you account for inventory consumed affects your P&L and food cost percentage. This is a bookkeeping and tax decision.
Menu pricing = for profitability
Your menu prices should be set based on the current market cost of your ingredients — updated whenever ingredient costs change significantly.
Price Your Menu Based on Current Costs
MenuPricer calculates the right price for every dish based on today's ingredient costs — not last month's average. Stay profitable through price volatility.
Try MenuPricer Free →Frequently Asked Questions
What is FIFO in restaurant inventory?
FIFO (First In, First Out) means the oldest inventory you purchased is assumed to be sold or used first. In restaurant terms, if you bought chicken at $3.50/lb last week and $4.00/lb this week, FIFO says the $3.50 chicken gets used first. This matches how good kitchens actually operate physically — older stock gets rotated to the front and used before newer deliveries. FIFO gives you a more current inventory value on your balance sheet but can understate food cost when prices are rising.
What is weighted average cost in restaurant inventory?
Weighted average cost (WAC) averages all purchase prices together based on quantity. If you bought 10 lbs of chicken at $3.50 and 10 lbs at $4.00, the weighted average cost is ($35 + $40) divided by 20 lbs = $3.75/lb. Every unit you use in a recipe gets costed at $3.75 regardless of when it was purchased. WAC smooths out price volatility and is simpler to manage than FIFO for most restaurant operations.
Which inventory costing method should restaurants use?
Most restaurants should use weighted average cost (WAC). It is simpler to calculate, smooths out price volatility, and is less susceptible to cost distortion when ingredients have multiple purchase prices. FIFO is a better choice for: restaurants with stable prices and high inventory turnover, operations that physically rotate stock, and businesses that need the most accurate possible current balance sheet values. Both methods are acceptable for tax purposes — consistency is more important than which one you choose.
How does inventory costing method affect food cost percentage?
In periods of rising prices, FIFO reports lower cost of goods sold (because older, cheaper inventory is consumed first) and therefore lower food cost percentage. WAC reports a smoothed, middle-ground cost. In periods of falling prices, FIFO reports higher COGS. For most restaurants where ingredient prices fluctuate regularly, WAC provides more stable food cost reporting. Changing methods mid-year affects comparability of your financial data, so pick one method and stick with it.
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