Last-In, First-Out (LIFO) 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 1Beginning Inventory60 units @ $15.00
5Purchase140 units @ $15.50
14Sale190 units @ $19.00
27Purchase70 units @ $16.00
29Sale30 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 SoldUnitsUnit CostTotal
Sales From Mar 27 Inventory70$16.00$1,120
Sales From Mar 5 Purchase140$15.50$2,170
Sales From Mar 1 Purchase10$15.00$150
 220 $3440
    
Ending InventoryUnitsUnit CostTotal
Inventory From Mar 27 Purchase50$15.00$750

LIFO Perpetual

DatePurchasesSalesBalance
UnitsUnit CostTotalUnitsUnit CostTotalUnitsUnit CostTotal
Mar 1      60$15.00$900
5140$15.50$2,170   60$15.00$900
       140$15.50$2,170
14   140$15.50$2,17010$15.00$150
    50$15.00$750   
2770$16.00$1,190   10$15.00$150
       70$16.00$1,120
29   30$16.00$48010$15.00$150
       40$16.00$640
31      10$15.00$150
       40$16.00$640

Written by Irfanullah Jan