If you sell products online, choosing the right stock valuation method is essential for accurate ecommerce COGS (Cost of Goods Sold), clean margins, and confident decision-making. In this guide, Philip Oakley from Outserve explains FIFO, LIFO, and Weighted Average, and why consistency is critical for ecommerce accounting. For most brands using Xero, Unleashed, Shopify, Amazon, and A2X, Weighted Average is often the most automated, scalable, and accurate method.
Also see our Frequently Asked Questions About Ecommerce COGS at the bottoms of this blog post
Understanding how to correctly value your inventory — and how that cost flows into your ecommerce COGS — is one of the most important steps toward building reliable financial reporting for your ecommerce business. Yet many brands misunderstand how cost flow methods work, which leads to inconsistent margins, incorrect profitability reporting, and poor strategic decisions.
In this article and video, we’re joined by Philip Oakley, founder of Outserve, one of the UK’s leading ecommerce accounting and systems integration specialists. Together with A2X, Philip breaks down the three main cost flow methods and explains how to choose the right approach for your ecommerce accounting setup.
Philip leads a specialist team at Outserve that helps ecommerce businesses scale using accurate numbers, automated integrations, and improved financial visibility. Outserve works with DTC brands, Amazon FBA sellers, and multi-channel Shopify merchants across the UK — helping them build financial systems designed for growth.
Your ecommerce COGS doesn’t just influence your profit — it shapes your cash flow, tax position, and operational decisions. When ecommerce brands use the wrong cost valuation method (or worse, mix multiple methods), it leads to:
When costs change — because of supply chain fluctuations, inflation, or supplier changes — the cost flow method you choose has a direct impact on your reported ecommerce COGS and profit.
FIFO assumes that the oldest inventory is sold first. This method often mirrors real-world operations, especially for businesses managing expiry dates such as food, beverage, cosmetics, and supplements.
Pros:
Considerations:
LIFO assumes your newest stock is sold first. While it reflects current costs more quickly, it’s rarely used in ecommerce and is not permitted under IFRS or UK GAAP.
Pros:
Considerations:
Weighted Average Cost blends all your current inventory into one consistent calculated average cost. It’s the most automation-friendly method and works beautifully across systems like Xero, Unleashed, Shopify, Amazon, and A2X.
Pros:
Considerations:
Mixing FIFO, LIFO, and Weighted Average leads to inconsistent data. Ecommerce brands that switch methods mid-year or use different methods across tools experience:
To make accurate strategic decisions, ecommerce businesses must apply one method consistently.
If yes → Weighted Average is often the strongest option.
If yes → LIFO is not permitted, so choose FIFO or Weighted Average.
If allowed in your region → LIFO may help, but is rarely relevant for UK ecommerce brands.
FIFO may sometimes be preferred, but Weighted Average is usually more consistent.
Weighted Average is the most automation-friendly and the method Outserve recommends for most brands.
No matter which method you choose, the most important rule is consistency. Document your chosen method, apply it across all systems, and align inventory management with accounting tools.
Outserve helps ecommerce brands build scalable financial systems using Xero, A2X, Unleashed, Shopify and Amazon. If you need help improving your ecommerce COGS, stock valuation, inventory accounting, or systems integration, Philip and the team are ready to support you - book a call today.
Choosing the right cost flow method can transform how clearly you understand your margins and financial performance. For most ecommerce brands, Outserve recommends the Weighted Average Cost method because it delivers consistency, automation, and better reporting — especially when integrated with Xero, Unleashed, A2X, Shopify, and Amazon.
Special thanks to A2X for hosting and producing the educational video featured in this guide. For more ecommerce accounting insights, watch the full video and explore the additional free resources available on the A2X YouTube channel.
Ecommerce COGS (Cost of Goods Sold) is the direct cost of the products you sell online, including landed costs, manufacturing, packaging, and freight. Accurately calculating ecommerce COGS ensures you understand true product profitability and can make smarter pricing and advertising decisions.
Most ecommerce brands benefit from the Weighted Average Cost method because it provides consistent, automated, and stable margins — especially when integrated with platforms like Xero, Unleashed, Shopify, Amazon, and A2X. It also handles cost fluctuations better than FIFO or LIFO.
No — Shopify and Amazon fees are operating expenses, not part of COGS. These fees should be recorded as selling expenses to keep your COGS clean and your product margins accurate.
Xero uses a moving weighted average cost method for inventory. This makes it ideal for ecommerce businesses that want automated COGS calculations without manual adjustments.
A2X automatically syncs sales, fees, and COGS into Xero or QuickBooks using accurate landed cost data. This automation eliminates spreadsheet errors, improves reporting accuracy, and ensures consistent ecommerce COGS across Amazon, Shopify, and other marketplaces.
LIFO is not permitted under UK GAAP or IFRS, so UK ecommerce businesses cannot use it for statutory reporting. It is only allowed under US GAAP. Most ecommerce brands instead use FIFO or Weighted Average.
Mixing FIFO, LIFO, and Weighted Average leads to inconsistent margins, incorrect profitability reporting, and unreliable year-on-year comparisons. To maintain accurate ecommerce COGS, you should choose one method and apply it consistently across all systems.
Ecommerce COGS should be updated automatically and continuously through your inventory and accounting systems. Using tools like Unleashed, A2X, Xero, and Shopify integrations ensures your COGS stays accurate in real time without manual calculations.
Yes — Weighted Average is ideal for businesses selling across multiple ecommerce channels (Shopify, Amazon, wholesale, marketplaces) because it provides smooth, consistent margins across all platforms and integrates well with modern cloud accounting tools.
Your ecommerce COGS is accurate if it aligns with your chosen cost flow method, matches your inventory system, and reconciles with your accounting records. If you're unsure, Outserve can audit your setup and help implement a clean, automated COGS process.
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