Last-in, First-out (LIFO) method

Last-in, First-out (LIFO) is also a commonly used cost method of inventory valuation. Although, application of LIFO is not allowed in financial accounting as per International Accounting Standard – 2  (IAS-2), but LIFO is still being used for management reporting purposes. LIFO is exactly the mirror image of FIFO, exactly opposite. Basic assumption of LIFO method is that the inventory purchased or manufactured last will be sold or consumed first, which means that at any time, value of inventory in hand will be the cost of oldest acquired units of inventory.

Rephrasing the basic assumption; In LIFO, it is assumed that newer items of inventory are sold first and older items remain in the inventory. However, it must be noted that this is merely an assumption used to calculate the cost of goods sold and value of inventory in hand. Actual physical flow of inventory may not be in accordance with this LIFO assumption.

Application of LIFO Method

LIFO method can be applied in Perpetual Inventory System as well as in Periodic Inventory System. The following example will elaborate how LIFO method is applied to calculate the cost of goods sold and value of inventory in hand.

Example

On 1 June, XYZ Company had an opening balance of 80 units of inventory costing $25 per unit. During the month of June, XYZ Company made following transactions:

Purchases

  • 3 June – 280 units @ $30 per unit
  • 12 June – 480 units @ $40 per unit
  • 20 June – 180 units @ $35 per unit

Sales

  • 7 June – 180 units
  • 9 June – 150 units
  • 15 June – 200 units
  • 25 June – 350 units

Calculate the following using LIFO method of valuation:

a) Cost of goods sold for the month of June
b) Value of inventory as at 30 June

Answer

LIFO (Periodic System of Inventory)

Movement of Inventory (Units)

Opening inventory 80
Purchases (280 + 480 + 180) 940
Units available for sale 1020
Units sold (180 + 150 + 200 + 350) 880
Closing inventory 140

Cost of Goods Sold

Date Units Rate ($) Cost ($)
    180 units sold
* from 3 June procurement
a
7 Jun
a
180
a
30
a
5,400
    150 units sold
* 100 from 3 June procurement
9 Jun 100 30 3,000
* 50 from opening inventory 9 Jun 50 25 1,250
    200 units sold
* from 12 June procurement
a
15 Jun
a
200
a
40
a
8,000
    350 units sold
* 180 from 20 June procurement
a
25 Jun
a
180
a
35
a
6,300
* 170 from 12 June procurement 25 Jun 170 40 6,800
880 30,750

Closing Inventory

Units Rate ($) Cost ($)
    140 units left in closing inventory
*  110 from 12 June procurement
a
110
a
40
a
4,400
*  30 from opening inventory 30 25 750
140 5,150

LIFO (Perpetual System of Inventory)

Date Purchases Sales Balance
Units @ $ Units @ $ Units @ $
1 Jun 80 25 2,000
3 Jun 280 30 8,400 80 25 2,000
280 30 8,400
7 Jun 180 30 5,400 80 25 2,000
100 30 3,000
9 Jun 100 30 3,000 30 25 750
50 25 1,250
12 Jun 480 40 19,200 30 25 750
480 40 19,200
15 Jun 200 40 8,000 30 25 750
280 40 11,200
20 Jun 180 35 6,300 30 25 750
280 40 11,200
180 35 6,300
25 Jun 180 35 6,300 30 25 750
170 40 6,800 110 40 4,400
    30,750  5,150

Cost of goods sold = $30,750

Closing inventory = $5,150