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:
- Cost of ending inventory.
- Cost of merchandise sold during the year 2013.
(1) Cost of ending inventory:
Before computing the cost of ending inventory, we need to compute the number of units in the ending inventory:
|Add purchases made during the year:|
|Available for sale during the year 2013||7,300||units|
|Less sales made during the year:|
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|
|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.
- Compute cost of materials issued to factory during the month.
- Compute ending inventory cost on 31 December.
(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|
|Cost of materials available for sale||$1,142|
|Less cost of materials issued to factory||$895|
|Cost of ending inventory||$247|