LIFO, last in, first out, costs what you used at your newest prices first. The formula is the same one every costing method shares, cost of goods sold = opening inventory + purchases − ending inventory. What LIFO changes is which costs count as used: the most recent purchases go into cost of goods sold, and the oldest costs stay in ending inventory. When prices are rising, that gives a higher cost of goods sold than FIFO and a lower stock value, which is why some larger businesses use it for tax. It's a costing method only. On the shelf a food business still uses the stock that expires first. In the US, LIFO for tax takes an election with the IRS, and a business that uses it for tax can't use a different method in its reports to owners or lenders. In the example below, a taro business's month of macadamia nuts is worked out under LIFO two ways, against the same month under FIFO.
The short version
- Cost of goods sold = opening inventory + purchases − ending inventory, under any method.
- LIFO: what's used is costed at the newest prices first; ending stock keeps the oldest.
- Periodic LIFO works it out at the end of the month; perpetual LIFO at each use.
- With rising prices, LIFO gives higher cost of goods sold and lower stock value than FIFO.
- It's a costing method; the shelf still runs first-expired-first-out.
- US tax: LIFO is an election, and the same method must be used in reports to owners and lenders.
- TaroStack uses FIFO cost layers or a moving average, not LIFO. More below.
The formulas
| Formula | |
|---|---|
| Cost of goods sold | Opening inventory + purchases − ending inventory |
| LIFO ending inventory | The oldest layers, up to the quantity left |
| LIFO cost of goods sold | The newest layers, up to the quantity used |
| Check | Cost of goods sold + ending inventory = everything available |
The same month under first in, first out is in FIFO method formula, and the average method in how to do weighted average cost.
A month, two ways
Windward Roots, the made-up taro business I use in these examples, buys macadamia nuts for its granola. November:
| Layer | Date | Kilos | Cost per kg | Value |
|---|---|---|---|---|
| 1 | On hand, Nov 1 | 10 | $20.00 | $200.00 |
| 2 | Delivery, Nov 4 | 25 | $22.00 | $550.00 |
| 3 | Delivery, Nov 18 | 20 | $24.00 | $480.00 |
| Available | 55 | $1,230.00 |
It used 28 kg from November 1 to 17 and 19 kg from November 18 to 30, 47 kg in all, leaving 8 kg.
Periodic LIFO looks only at the month's end: the 47 kg used come from the newest layers first.
47 kg used 20 kg from layer 3 at $24.00 = $480.00
25 kg from layer 2 at $22.00 = $550.00
2 kg from layer 1 at $20.00 = $40.00
Cost of goods sold $1,070.00
Left 8 kg of layer 1 at $20.00 = $160.00
Perpetual LIFO costs each use when it happens, from the newest layer on hand at the time. Layer 3 hadn't arrived for the first 28 kg:
First 28 kg 25 kg from layer 2 at $22.00 = $550.00
3 kg from layer 1 at $20.00 = $60.00
Next 19 kg 19 kg from layer 3 at $24.00 = $456.00
Cost of goods sold $1,066.00
Left 7 kg of layer 1 at $20.00 = $140.00
1 kg of layer 3 at $24.00 = $24.00
$164.00
Both check out: $1,070 + $160 and $1,066 + $164 are each $1,230.
LIFO against FIFO
| Method | Cost of goods sold | Ending inventory |
|---|---|---|
| FIFO | $1,038.00 | $192.00 |
| Periodic LIFO | $1,070.00 | $160.00 |
| Perpetual LIFO | $1,066.00 | $164.00 |
With prices climbing from $20 to $24, LIFO puts the dearer nuts into November's cost and leaves the cheapest on the shelf. Over many years of rising prices, a LIFO stock value can drift far below what the stock would cost to replace, which is the main argument against it for a small business: the balance sheet stops saying what's on the shelf is worth.
The tax rule
| Rule | Where |
|---|---|
| Election | LIFO is used for the goods named in an application to the IRS (26 U.S.C. 472(a)) |
| What's left | Goods on hand at year end are treated as those from opening inventory first, then the earliest acquired, at cost (472(b)) |
| At cost | The LIFO inventory is taken at cost regardless of market value (26 CFR 1.472-2(b)) |
| Conformity | No other method in reports to owners or for credit purposes (472(c)) |
Whether LIFO suits your business is a question for your accountant. This is general information, not tax advice. How stock is valued more broadly is in what is inventory valuation.
Get the calculator
Download the LIFO calculator. One sheet: type each layer's date, kilos and cost and the quantity used; periodic LIFO cost of goods sold and ending inventory work themselves out, with FIFO beside them for the same layers. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.
Where this stops working
Three layers and one ingredient fit on a page. Forty ingredients, deliveries every week and batches every day don't, and a cost sheet with one price per ingredient hides which month's prices a batch really used.
How TaroStack does it
TaroStack doesn't use LIFO. It costs stock with FIFO cost layers or a moving average, your choice, and records each use against them.
Cost layers. Each delivery is a cost layer, freight and other landed costs included, and each batch takes its cost from the layers it used.
Actual against standard. A batch shows what its ingredients really cost next to the recipe's standard cost, so a month of dearer macadamias shows up in the granola's cost.
Stock value by month. Stock value by site and month, and a price-creep report per supplier, show what rising prices are doing.
| The job | Spreadsheet | In TaroStack |
|---|---|---|
| Which price a batch used | One price per ingredient | FIFO layers or moving average |
| What the shelf is worth | A count times a guess | Stock value by site and month |
| Prices creeping up | Noticed late | A price-creep report per supplier |
FIFO cost layers, true batch cost and stock value are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.