LAST – IN – FIRST – OUT (LIFO )

LAST – IN – FIRST – OUT (LIFO )

 This is a method of inventory valuation base on the assumption that the goods purchase most recently(the last in) are sold or used first (the first out). The remaining items are assumed to have been purchased at successively earlier periods. In this method, value of the inventory at the end of an accounting period is based on the value of items purchased earliest. During periods of high inflation rate, the last in first out (LIFO)  method yield lower value of the ending inventory, higher cost of goods sold, a lower gross profit ( hence lower taxable income) than that yielded by the application of the first in first out (FIFO) method. During prolong inflationary periods, however LIFO method can seriously understate the value of inventory because the cost of replacing it would be much higher than the value shown in account.

This method is also referred to as at first in last out (FILO) which is define as method of inventory valuation base on the assumption that goods are sold or used in the opposite chronological order in which they are bought. Hence, the cost of goods purchase first is the cost of goods sold last. To visualize this, it may easier to consider inventory to be a stake of plates. The first plate added (first in)  will stay at the bottom of the stack as long as new plate added on top. In times of rising prices the FILO method record the sale of the most recent items first. FILO is the same as the last in first out (LIFO) accounting method.

Consequently, the unit cost of beginning inventory and the earliest purchases are incorporated in the ending inventory figure. Hence, ending cost is measured at the oldest cost where as the production cost is measured at the newest unit cost.

Larson and miller (1992;424) noted that one argument for the use of LIFO is base on the fact that a going concern most replace the inventory items in sales. When goods are sold replacement are purchased. According to this point of  view a correct matching of cost with revenue requires matching replacement cost with sales that make the replacement necessary. Although the cost of  the most recent purchase is not quite the same as replacement cost, they are close approximations of replacement costs. Because LIFO assigns the most recent purchase costs to income statement, LIFO (compared to FIFO and weighted average) comes closest to matching replacement cost with revenues. The LIFO method is suitable in terms of rising prices because materials issued are price at the price of the latest available consignment in the store which is closely related to the current price level whereas FIFO method is useful when prices of materials are falling.

Eyisi, S A (2003:25) stated that this method is the opposite of  FIFO. In this method stocks issued out are priced last in purchased goods. The assumption here is that the issued out material is assumed to be last in purchased (received) goods. As the result of the above, the closing stock unit are valued at the oldest unit goods available. This method is useful during the time of inflation; as materials acquired previously or which are valued at the current price of recently purchased goods.ie. at a lesser price assumed to be valued at the most recent price of purchased of goods. Under this method cost are matched with income and product cost is based on current prices and as such could be said to be more realistic.

The Advantages of  LIFO includes the following;

• It ensures that issues are close to current economic value stock.
• Valuation of stock balance is usually very conservative.
• Materials are issued at cost price and therefore, no profit or loss will result by using this method.

          This method also have Disadvantage and they include:

• Since the goods are issued out based on the current stocks received, the oldest materials are left in stock and this exposes them to the risk of loss through pilferage ,obsolescence, deterioration and spoilage.
• It makes comparison between two jobs or contracts difficult when the materials issued in the two jobs were valued using different methods.
• It is administratively cumbersome because it requires the recording system to keep track of batches.

REFERENCES

Ekwe, M. E (2003).An Insight into Costing. Enugu; Two Way Printers Nigeria

Enekwe, C. I (2010).Basic Fundamentals in Accounting.Volume Two. Enugu; Providence Press Nig. Limited  

Eyisi, S.A (2003).Cost Accounting Theories and Practice.Enugu; Ayi- Best

Publishers.

Horngren, C. T & George Foster .(2011). Cost Accounting.A Managerial Emphasis

(14^th Edition). London: Prentice Hall.

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