LIFO Inventory

Lesson:

LIFO stands for last in, first out. This means that newer inventory is sold first, and older inventory is kept longer.

Imagine a stack of cups. The ones closer to the top were stacked the most recently. When someone decides to take a cup, he'll take it from the top, right? That means he's going to get the cup that was placed in the stack more recently than the others. In other words, the last cup that was added in is the first cup that is taken out.

Coincidentally, many accountants reference the term LIFO when explaining that they are, in fact, the LIFO the party, which only further highlights the fact that accountants tend to have a terrible sense of humor.

You're managing an inventory system using the LIFO method.

Here's what you know:

Your inventory of stools was purchased in different quantities and at different prices, as shown below:

Inventory Holdings
Inventory Purchase	Count	Price per Unit	Product Name
Purchase #1	46	$18	Stools
Purchase #2	22	$19	Stools
Purchase #3	36	$28	Stools
Purchase #4	19	$29	Stools
Purchase #5	47	$33	Stools

Right after updating your inventory records, customers bought 82 stools.

Using the LIFO method, what is the COGS of the items you just sold?

Answer:

The COGS is $2,550.00.

Explanation:

The first step should be to write out the current inventory.

Inventory Holdings
Inventory Purchase	Count	Price per Unit	Product Name
Purchase #1	46	$18	Stools
Purchase #2	22	$19	Stools
Purchase #3	36	$28	Stools
Purchase #4	19	$29	Stools
Purchase #5	47	$33	Stools

Now write down the number of customer sales we need to account for (82) and the quantity of items that the firm bought in the most recent inventory purchase in our table (47).
We need to account for more sales than can be covered by our most recent inventory purchase. Let's remove the entire most recent inventory purchase from our inventory table and reduce the number of sales we have to account for by the quantity of inventory we just removed (47).
82 - 47 = 35
Don't forget that we're trying to solve for COGS though, so as we sell items, we have to record their costs.
COGS FOR THIS ROW = 47 * $33

Now our inventory table looks like this.

Inventory Holdings
Inventory Purchase	Count	Price per Unit	Product Name
Purchase #1	46	$18	Stools
Purchase #2	22	$19	Stools
Purchase #3	36	$28	Stools
Purchase #4	19	$29	Stools

Now write down the number of customer sales we need to account for (35) and the quantity of items that the firm bought in the most recent inventory purchase in our table (19).
We need to account for more sales than can be covered by our most recent inventory purchase. Let's remove the entire most recent inventory purchase from our inventory table and reduce the number of sales we have to account for by the quantity of inventory we just removed (19).
35 - 19 = 16
Don't forget that we're trying to solve for COGS though, so as we sell items, we have to record their costs.
COGS FOR THIS ROW = 19 * $29

Now our inventory table looks like this.

Inventory Holdings
Inventory Purchase	Count	Price per Unit	Product Name
Purchase #1	46	$18	Stools
Purchase #2	22	$19	Stools
Purchase #3	36	$28	Stools

Now write down the number of customer sales we need to account for (16) and the quantity of items that the firm bought in the most recent inventory purchase in our table (36).
Since the number of items we need to account for (16) is lower than the remaining items left in the most recent inventory purchase (36), we can just reduce the quantity of items in the most recent inventory purchase by (16).
Don't forget that we're trying to solve for COGS though, so as we sell items, we have to record their costs.
COGS FOR THIS ROW = 16 * $28

Here's the final state of our inventory table:

Inventory Holdings
Inventory Purchase	Count	Price per Unit	Product Name
Purchase #1	46	$18	Stools
Purchase #2	22	$19	Stools
Purchase #3	20	$28	Stools

And now we just have to take all of those statements where we figured out the COGS for each row, and add them up.
TOTAL COGS = 47 * $33 + 19 * $29 + 16 * $28