There are several methods of inventory valuation and LIFO is one of them. Under this method, we assume that items purchased last are also sold first. It means that the remaining inventory/closing inventory is the one which is purchased/ manufactured at the beginning. The cost of sale under this method which comprises cost of inventory purchased/ manufactured at last. The cost of sale figure depends upon the value of the older inventory items. This method of inventory valuation is very effective in saving a lot of tax.
Applications
LIFO method can be applied in both periodic inventory system and perpetual inventory system.
Example Question LIFO Periodic Inventory System
Tata manufacturing uses periodic inventory system. The opening inventory of one item on 1 January and purchases during the month of January are as follows:
| Jan 1 | Inventory | 10,000 units | @$12 |
| Jan 8 | Purchases | 15,000 units | @$16 |
| Jan 14 | Purchases | 18,000 units | @$18 |
| Jan 22 | Purchases | 12,000 units | @$19 |
| Jan 27 | Purchases | 5,000 units | @$21 |
During the month of Jan,35,000 units were sold.
Required:
Determine the cost of ending inventory and cost of goods sold using Last in, First Out Method..
Answer
Purchase Schedule
| Date | Description | Units | Rate ($) | Total |
| Jan 01 | Opening | 10,000 | 12 | 120,000 |
| Jan 08 | Purchases | 15,000 | 16 | 240,000 |
| Jan 14 | Purchases | 18,000 | 18 | 324,000 |
| Jan 22 | Purchases | 12,000 | 19 | 228,000 |
| Jan 27 | Purchases | 5,000 | 21 | 105,000 |
| Available for sale | 60,000 | 1,017,000 |
| Units available for sale | (10,000+15,000+18,000+12,000+5000) | 60,000 |
| Units sold | 35,000 | |
| Units at end | (60,000-35,000) | 25,000 |
Cost of material closing inventory
LIFO Method
Periodic System
| Date | Description | Units | Rate ($) | Total |
| Jan 01 | Purchases | 10,000 | 12 | 120,000 |
| Jan 08 | Purchases | 15,000 | 16 | 240,000 |
| Closing inventory | 25,000 | 360,000 |
Cost of Goods Sold
| Description | FIF0 |
| Opening inventoryAdd: PurchasesInventory available for saleLess: Closing InventoryCost of goods sold | 120,000897,0001,017,000(360,000)657,000 |
Example Question LIFO Perpetual Inventory System
Simon & Co is engaged in the production of terry towels. As inventory is a big portion of its business, it decided to implement LIFO (last in first out) inventory valuation method. For inventory management and control, Simon & Co uses Periodic Inventory System. Following information is relevant here:
| Oct 1 | Opening inventory 4000 units @ $ 12. |
| Oct 12 | Simon & Co purchases 8000 units @ $ 14. |
| Oct 18 | Simon & Co purchases 20000 units @ $ 18. |
| Oct 22 | Simon & Co purchases 16000 units @ $ 22. |
| Oct 29 | Simon & Co purchases 10000 units @ $ ?. |
| Oct 30 | Closing inventory 14000 units. |
Cost of goods sold $ 8,76,000.
Required
Compute:
- Cost of ending inventory
- Total cost and unit cost of Oct 29 purchases.
Solution
Simon & Company
Closing Inventory Cost – LIFO Method
| Date | Particulars | Units | Per Unit | Cost |
| Oct 1 | Opening Inventory | 4000 | 12 | 48,000 |
| Oct 12 | Purchase | 8000 | 14 | 112,000 |
| Oct 18 | Purchase | 2000 | 18 | 36,000 |
| Oct 30 | Closing inventory cost | 7000 | 196,000 |
Total Cost of November 29 Purchase
| Cost of goods sold | 876,000 | |
| Add: ending inventory | 196,000 | |
| Inventory available for sale | 1,072,000 | |
| Less: opening inventory | 48,000 | |
| Total purchases | 1,024,000 | |
| Less: | ||
| Purchase Nov 12, 8000 x 14 | 112,000 | |
| Purchase Nov 18, 20000 x 18 | 360,000 | |
| Purchase Nov 22, 16000 x 22 | 352,000 | 824,000 |
| Total cost of Nov 29, Purchases | 200,000 | |
| Total units of Nov 29, Purchase | 10,000 | |
| Per unit cost (200,000 / 10000) | 20 |
Inventory Card Perpetual Inventory System – LIFO Method Example Question & Answer
HT is a shoe manufacturing company operating in UK. It has warehouse in South London where it stocks all its raw material goods. HT uses perpetual inventory system for better inventory management. Following are the transactions related to its raw material goods:
| Sep 01 | Opening stock 14,000 units of $ 49,000. |
| Sep 05 | HT purchased 7,200 units for cash $ 18,000. |
| Sep 09 | HT purchased 8,000 units on credit term for $ 32,000. |
| Sep 13 | Raw material units 10,000 sold to other entity for cash 50,000. |
| Sep 17 | HT purchased 7,000 units for $ 28,000. |
| Sep 21 | HT sold 6,000 units for cash $ 30,000 |
| Sep 25 | HT sold 7,800 units for cash $ 39,000. |
| Sep 29 | Purchased 8,800 units on cash for $ 22,000. |
| Sep 30 | HT sold on credit for 30 days 10,000 units for $ 50,000. |
Required
Prepare inventory card using LIFO method.
Solution
HT Company
Inventory Card
LIFO Method
| Date | Purchases | Sales | Balance | ||||||
| Sep | Units | PU | Cost | Units | PU | Cost | Units | PU | Cost |
| 01 | 14000 | 3.5 | 49,000 | ||||||
| 05 | 7200 | 2.5 | 18,000 | 14000 | 3.5 | 49,000 | |||
| 7200 | 2.5 | 18,000 | |||||||
| 09 | 8000 | 4 | 32,000 | 14000 | 3.5 | 49,000 | |||
| 7200 | 2.5 | 18,000 | |||||||
| 8000 | 4 | 32,000 | |||||||
| 13 | 2000 | 2.5 | 5,000 | 14000 | 3.5 | 49,000 | |||
| 8000 | 4 | 32,000 | 5200 | 2.5 | 13,000 | ||||
| 17 | 7000 | 4 | 28,000 | 14000 | 3.5 | 49,000 | |||
| 5200 | 2.5 | 13,000 | |||||||
| 7000 | 4 | 28,000 | |||||||
| 21 | 6000 | 4 | 24,000 | 14000 | 3.5 | 49,000 | |||
| 5200 | 2.5 | 13,000 | |||||||
| 1000 | 4 | 4,000 | |||||||
| 25 | 1000 | 4 | 4,000 | 12400 | 3.5 | 43,400 | |||
| 5200 | 2.5 | 13,000 | |||||||
| 1600 | 3.5 | 5,600 | |||||||
| 29 | 8800 | 2.5 | 22,000 | 12400 | 3.5 | 43,400 | |||
| 8800 | 2.5 | 22,000 | |||||||
| 30 | 8800 | 2.5 | 22,000 | 11200 | 3.5 | 39,200 | |||
| 1200 | 3.5 | 4,200 | |||||||
| 31000 | 100,000 | 33800 | 109,800 | 11200 | 39,200 |