Last-in First-out (LIFO)
LIFO is a valuation method in which the products purchased (and delivered) last are sold first. LIFO refers to the assumption that the value of the stock is kept at the lowest level, as the latest received products are usually at a higher price. This means that the products with the lowest value will remain.
In LIFO, the cost of goods sold is based upon the cost of material bought towards the end of the period, resulting in costs that closely approximate current costs.
The stock, however, is valued on the basis of the cost of materials bought earlier in the year.
The stock, however, is valued on the basis of the cost of materials bought earlier in the year.
For more information, see Adding a Product > Stock valuation methods.
Example: the following example illustrates how a LIFO based stock valuation is done.
• Purchase price(s) of a product as on:
1st January = 100 and 1st June = 110
1st January = 100 and 1st June = 110
• Items are ordered and received (total 30 items) on:
• - 5th of January = 10
• - 5th of June and = 10
• - 5th of August = 10
• 2 items are issued on 1st February.
10 items are issued on 1st of July.
Stock value based on LIFO:
- 5th Jan: 10 * 100 = 1000 (average price (1000 / 10) = 100)
- 1st Feb: (10 - 2) * 100 = 800 (average price (800 / 8) = 100)
- 5th June: (10 - 2) * 100 = 800 (batch of 5th Jan)
(10 * 110) = 1,100 (batch of 5th June)
- Total stock value = 1,900 (average price (1900 / 18) = 105, 5556)
- 1st July: (10 - 2) * 100 = 800 (batch of 5th Jan)
- 1st July: (10 - 2) * 100 = 800 (batch of 5th Jan)
(10 - 10) * 110) = 0 (batch of 5th June)
Total value 800 (average price (800 / 8) = 100)
- 5th August: (10 - 2) *100 = 800 (batch of 5th Jan)
(10 - 10) * 110) = 0 (batch of 5th June)
(10 - 0) * 110) = 1,100 (batch of 5th August)
Total value 1.900 (average price (1,900 / 18) = 105.5556)
 | In LIFO, the last received batches will be used to deliver and valuate the products. That is the reason that the batch received on June 5th is used to issue the goods on July 1st. Note that with LIFO, the value of the stock item is calculated from the sum of the (rounded) remaining value of the (non-depleted) batches. |