Under last-in, first-out (LIFO) method, the costs are charged against revenues in reverse chronological order i.e., the last costs incurred are first costs expensed. In other words, it assumes that the merchandise sold to customers or materials issued to factory has come from the most recent purchases. The ending inventory under LIFO would, therefore, consist of the oldest costs incurred to purchase merchandise or materials inventory.

LIFO is extensively used in periodic as well as perpetual inventory system. In this article, the use of LIFO method in periodic inventory system is explained with the help of examples. To understand the use of LIFO in a perpetual inventory system, read “last-in, first-out (LIFO) method in a perpetual inventory system” article.

Example – LIFO periodic system in a merchandising company:

A trading company has provided the following data about purchases and sales of a commodity made during the year 2013.

Jan. 01 Beginning inventory: 1000 units @ $16 per unit.
Feb. 15 Purchases: 1800 units @ $18 per unit.
Mar. 25 Sales: 1500 units.
Apr. 15 Purchases: 1000 units @ $20 per unit.
 May. 20 Sales: 500 units.
Jun. 25 Sales: 400 units.
Jul. 10 Purchases: 2000 units @ 22 per unit.
 Aug. 25 Sales: 1000 units.
Sep. 15 Sales: 1200 units.
 Oct. 20 Purchases: 1500 units @ $24 per unit
 Nov. 15 Sales: 600 units.
 Dec. 25 Sales: 800 units.

The company uses periodic inventory system to account for sales and purchases of inventory.

Required: Assuming a last-in, first-out cost flow assumption, compute:

  1. Cost of ending inventory.
  2. Cost of merchandise sold during the year 2013.

Solution:

 (1) Cost of ending inventory:

Before computing the cost of ending inventory, we need to compute the number of units in the ending inventory:

Beginning inventory 1,000 units
Add purchases made during the year:
Feb. 15 1,800
Apr. 15 1,000
Jun. 10 2,000
Oct. 20 1,500 6,300 units
——– ——–
Available for sale during the year 2013 7,300 units
Less sales made during the year:
Mar. 25 1,500
May. 20 500
Jun. 25 400
Aug. 25 1,000
Sep. 15 1,200
Nov. 15 600
Dec. 25 800 6,000 units
——– ——–
Ending inventory 1,300 units
——–

The above 1,300 units in the ending inventory would be valued in a LIFO periodic system as follows:

The earliest cost; January 1, 2013 1000 units @ $16 per unit $16,000
The next earliest cost; February 15, 2013 300 units @ $18 per unit $5400
———
The cost of inventory on 31 December, 2013 21,400
———

LIFO periodic system is also used by manufacturing companies for recording and costing materials. Consider the following example:

Example-LIFO periodic system in a manufacturing company:

The HEC is a manufacturing company that uses periodic inventory system. The physical inventory of materials is priced using LIFO method. The following data is available for the month of December:

Date Event Units Per unit cost Cost
Jan. 1 Beginning inventory 50 $2.00 $100
”  12 Purchase 90 $2.10 $189
”  19 Purchase 230 $2.20 $506
”  25 Purchase 110 $2.30 $253
”  29 Purchase 40 $2.35 $94
 —— ——
Available for use during the month 520  $1,142
 —— ——

On 31st December, a physical count was made and 120 units of material were found in the store room.

Required:

  1. Compute cost of materials issued to factory during the month.
  2. Compute ending inventory cost on 31 December.

Solution:

(1). Cost of materials issued to factory during December:

Number of units issued to factor:
Available for sale during the month 520 units
Ending inventory 120 units
———–
Issued to factory during the month 400 units
———–
From 29 December purchases 40 units issued @ 2.35  $94
From 25 December purchases 110 units issued @ 2.30  $253
From 19 December purchases 230 units issued @ 2.20  $506
From 12 December purchases 20 units issued @ 2.10  $42
——-
Cost of materials issued to factory during the month $895
——-

(2). Cost of ending inventory:

From beginning inventory 50 units @ 2.00 $100
From 12 December purchases 70 units @ 2.10 $147
——–
Cost of ending inventory $247
——–
OR
Cost of materials available for sale $1,142
Less cost of materials issued to factory $895
——–
Cost of ending inventory $247
——–
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