LIFO (Last-In, First-Out)

Definition

An inventory costing method assuming the newest units purchased are sold first. When costs rise, LIFO produces the highest COGS and lowest profit.

💡Think of it like this

Think of it like a coal pile—you grab from the top (newest) first.

📐Formula

COGS = Cost of Newest Inventory × Units Sold

📝Example

Using the same purchase data (100 units at $5, then 100 at $8), LIFO assigns $8 to the first 100 units sold and $5 to the next 50 units. Total COGS = (100 × $8) + (50 × $5) = $1,050—higher than FIFO!

Related Terms

Inventory

Goods held for sale (finished goods), in production (work in process), or awaiting use in production (raw materials). A current asset.

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