How LIFO Inventory Costing Works
LIFO (Last In, First Out) is an inventory costing method that assumes the most recently purchased units are the first ones sold. This calculator applies LIFO across two inventory layers: your beginning inventory and your most recent purchase.
To find cost of goods sold (COGS), units sold are first taken from the most recent purchase layer at its cost per unit; if more units were sold than that layer holds, the remainder comes from the beginning inventory layer at its (usually older, often lower) cost. Whatever units are left over become the ending inventory, valued at their respective layer costs.
- In periods of rising prices, LIFO typically produces a higher COGS and lower ending inventory value than FIFO, which can reduce reported taxable income.
- The units-sold figure is automatically capped at total units available, since you can’t sell more than you have.
Note: This is a simplified two-layer illustration for general educational purposes. Real inventory systems may track many purchase layers, and some jurisdictions restrict or prohibit the use of LIFO for tax reporting.