Last-In, First-Out Inventory Method
Last-In, First-Out is one of the common techniques used in the valuation of inventory on hand at the end of a period and the cost of goods sold during the period. LIFO assumes that goods which made their way to inventory (after purchase, manufacture etc.) later are sold first and those which are manufactured or acquired early are sold last. Thus LIFO assigns the cost of newer inventory to cost of goods sold and cost of older inventory to ending inventory account. This method is exactly opposite to first-in, first-out method.
Last-In, First-Out method is used differently under periodic inventory system and perpetual inventory system. Let us use the same example that we used in FIFO method to illustrate the use of last-in, first-out method.
Example
Use LIFO on the following information to calculate the value of ending inventory and the cost of goods sold of March.
Mar 1 | Beginning Inventory | 60 units @ $15.00 |
5 | Purchase | 140 units @ $15.50 |
14 | Sale | 190 units @ $19.00 |
27 | Purchase | 70 units @ $16.00 |
29 | Sale | 30 units @ $19.50 |
Solution
LIFO Periodic
Units Available for Sale | = 60 + 140 + 70 | = 270 | |
Units Sold | = 190 + 30 | = 220 | |
Units in Ending Inventory | = 270 − 220 | = 50 | |
Cost of Goods Sold | Units | Unit Cost | Total |
Sales From Mar 27 Inventory | 70 | $16.00 | $1,120 |
Sales From Mar 5 Purchase | 140 | $15.50 | $2,170 |
Sales From Mar 1 Purchase | 10 | $15.00 | $150 |
220 | $3440 | ||
Ending Inventory | Units | Unit Cost | Total |
Inventory From Mar 27 Purchase | 50 | $15.00 | $750 |
LIFO Perpetual
Date | Purchases | Sales | Balance | ||||||
Units | Unit Cost | Total | Units | Unit Cost | Total | Units | Unit Cost | Total | |
Mar 1 | 60 | $15.00 | $900 | ||||||
5 | 140 | $15.50 | $2,170 | 60 | $15.00 | $900 | |||
140 | $15.50 | $2,170 | |||||||
14 | 140 | $15.50 | $2,170 | 10 | $15.00 | $150 | |||
50 | $15.00 | $750 | |||||||
27 | 70 | $16.00 | $1,190 | 10 | $15.00 | $150 | |||
70 | $16.00 | $1,120 | |||||||
29 | 30 | $16.00 | $480 | 10 | $15.00 | $150 | |||
40 | $16.00 | $640 | |||||||
31 | 10 | $15.00 | $150 | ||||||
40 | $16.00 | $640 |
by Irfanullah Jan, ACCA and last modified on