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Last-In-First-Out (FIFO) method
LIFO method definition
In last in first out (LIFO) method, the recently purchased goods are sold or used at first. The beginning and earlier goods purchased are ending inventory. This method is applicable to the organization which durable goods. The advantages of this method over the FIFO method is that it helps to save tax because the cost of goods sold under this method for the same information is higher than that in the FIFO method.
Last-in-first-out (LIFO) method is used in both periodic and perpetual inventory system to calculate the cost of ending inventory and cost of goods sold. Under both inventory system, maybe the LIFO method provided output (answer) is not the same over the same information (question). When in purchasing transactions of a company, if there is unit cost of inventory is continuous increases LIFO method saves the income tax expense of a company. Similarly, if there is unit cost of inventory is continuous decreases LIFO method increases the tax expenses for a company over the same information.
Comparison with the FIFO method
In comparison with Last-in-first-out (LIFO) method and FIFO method. When there is unit cost of inventory is continuous increases (e.g. Rs. 2, 5, 6, 8, & so on) in that case LIFO method provides less tax to the company. Also, when there is unit cost of inventory is continuous decreases (e.g. Rs. 8, 6, 5, 3) in that case the FIFO method provides less tax to the company. Similarly, when there is unit cost of inventory is sometimes increases or decreases (e.g. Rs. 2, 7, 4, 6, 9) in that case either LIFO or FIFO method provides less tax to the company. It means that it is necessary to calculate manually.
Having a higher cost of goods sold (COGS) amount method provides less tax for the company. It is because the cost of goods sold helps to reduce the gross profit to the business firm and tax.
May we also illustrate to clarify the above discussion
Example-I: In Case of Increasing Unit cost
The following information was found in the books of ABC Company for the month of January 2019. Purchases for the month are as follows:
| Date | Units | Unit Cost |
| January 1 | 400 | 4 |
| January 3 | 800 | 5 |
| January 19 | 1,000 | 7 |
| January 26 | 400 | 9 |
During the month the company sold 2,000 units @ Rs. 12 each. Using the LIFO method calculate the cost of ending inventory and cost of goods sold under the periodic inventory system.
Solution:
Under periodic inventory system
Calculation of cost of goods available for sales
| Date of purchase | Units purchased | Unit Cost | Total Cost (Rs.) |
| Beginning inventory January 3 January 19 January 26 | 400 800 1,000 400 | 4 5 7 9 | 1,600 4,000 7,000 3,600 |
| Total | 2,600 | 16,200 |
Cost of goods sold schedule
Under the LIFO method
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| January 26 January 19 January 3 | 400 1,000 600 | 9 7 5 | 3,600 7,000 3,000 |
| Total | 2,000 | 13,600 |
Cost of ending inventory
Under the LIFO method
| Date of purchase | Units on hand | Unit cost | Total cost Rs. |
| January 3 Beginning inventory | 200 400 | 5 4 | 1,000 1,600 |
| Total | 600 | 2,600 |
Hence, cost of goods sold = Rs. 13,600 and cost of ending inventory = Rs. 2,600
Example-II: In Case of Decreasing Unit cost
Following information’s are available in the book of ABC Company at the time of January 2019.
Purchases during the month,
| Date | Units | Unit Cost |
| January 1 | 400 | 9 |
| January 3 | 800 | 7 |
| January 19 | 1,000 | 5 |
| January 26 | 400 | 4 |
The company sold 2,000 units during the month @ Rs. 12 each. Using the LIFO method calculate the cost of ending inventory and cost of goods sold under the periodic inventory system.
Solution:
Under the Periodic Inventory System
Calculation of cost of goods available for sale
| Date of purchase | Units purchased | Unit cost | Total Cost (Rs) |
| Beginning inventory January 3 January 19 January 26 | 400 800 1,000 400 | 9 7 5 4 | 3,600 5,600 5,000 1,600 |
| Total | 2,600 | 15,800 |
Using the LIFO method
Cost of goods sold schedule
| Date of purchase | Units sold | Unit cost | Total cost (Rs.) |
| January 26 January 19 January 3 | 400 1,000 600 | 4 5 7 | 1,600 5,000 4,200 |
| Total | 2,000 | 10,800 |
Cost of Ending inventory
| Date of purchase | Units in hand | Unit cost | Total cost (Rs.) |
| January 3 Beginning inventory | 200 400 | 7 9 | 1,400 3,600 |
| Total | 600 | 5,000 |
Hence, cost of goods sold = Rs. 10,800 and cost of ending inventory = 5,000