When identical parts were bought at different prices, something has to decide which cost applies to the one just used. That decision is inventory valuation.
The methods
First in, first out. The oldest stock is treated as used first. Costs assigned to jobs follow the older, usually lower, prices, and what remains on the shelf is valued near current prices.
Weighted average. All units of a part share one blended cost. Simplest to run, and it smooths price swings rather than reflecting them.
Last in, first out. The newest stock is treated as used first. Permitted in some jurisdictions and not others, and less common in small service businesses.
Why it changes the numbers
In a period of rising prices, first-in-first-out assigns lower costs to jobs, which reports a higher gross margin and higher profit — and therefore higher tax.
The business bought and used exactly the same parts either way. Only the accounting differs.
Why it matters to a trade business
Where material prices have moved sharply, job margin can look healthy on old stock costs while replacement costs have risen. The margin is real historically and not repeatable.
The practical guard is pricing from current replacement cost rather than from what the stock on the shelf cost — see pricing adequacy.
Consistency
The method is chosen once and applied consistently. Switching between methods changes reported profit without anything real changing, which is why it is constrained.
The count still has to be right
Any method applied to a stock figure nobody has verified is arithmetic on a guess — see improving inventory turns and inventory.