Last in first out (LIFO) cost flow method
Subject: Accounting | Topics:

The method of last-in, first-out assumes that the cost of the goods purchased last is charged to the cost of goods sold first.

Last-in, first-out (LIFO) inventory costing method assumes that the cost of latest inventories acquired are the first to be recognized as the cost of goods sold.

In the example above, the cost of $5,500 Ford will be assigned to the cost of goods sold.

Example of LIFO cost flow method

Under LIFO, the cost of goods sold is calculated by using the costs of drills purchased last. The computation is shown below:

Illusration: Brid’s Drills cost of goods sold under LIFO
Purchase Two

80 units x $20

=$1,600
Purchase One

120 units x $18

=$2,160
Beginning Inventory

70 units x $15

=$1,050
Total

270 units

$4,810

The 30 units from the beginning inventory remain in the Inventory account.

The net income is determined by subtracting the cost of goods sold from sales: $5,990 ($10,800 – $4,810). The income tax to be paid is $1,797 ($5,990 x 30%).

Last in first out (LIFO) cost flow method

 

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