LIFO (Last-In-First-Out) Inventory Cost Method

Definition:

LIFO, which stands for "last-in-first-out," is an inventory costing method which assumes that the last items placed in inventory are the first sold during an accounting year. Thus, the inventory at the end of a year consists of the goods placed in inventory at the beginning of the year, rather than at the end. LIFO is one method used to determine Cost of Goods Sold for a business.

Here is how inventory cost is calculated using the LIFO method:
Assume a product is made in three batches during the year. The costs and quantity of each batch are:

• Batch 1: Quantity 2,000 pieces, Cost to produce $8000
  
• Batch 2: Quantity 1500 pieces, Cost to produce $7000
  
• Batch 3: Quantity 1700 pieces, Cost to produce $7700

Let's say you sold 4000 units during the year, out of the 5200 produced.
Then calculate the unit costs for each batch:

• Batch 1: 8000/2000 = 4
  
• Batch 2: 7000/1500 = 4.667
  
• Batch 3: 7700/1700 = 4.529

So, of the 4000 units sold, using LIFO
The first 1700 units sold from the last batch cost $4.529 per unit

• The next 1500 units sold from the second batch cost $4.667 per unit
  
• And the last 800 units sold from the first batch cost $4.

The cost of the remaining 1200 units from the first batch is $4 each. These units will start off the next year.