LIFO (Last In First Out) Inventory

Posted in Operations and Supply Chain Terms, Total Reads: 2518
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Definition: LIFO (Last In First Out) Inventory

LIFO or Last In First Out is a type of inventory management in which the last item stocked, is the one taken out in case any of the items is to be used.

As the classic example goes, in a stack of dishes ,kept one over the other the dish that can be taken out is the last that was kept in the pile.

A Stack of Dishes- LIFO


Example:


How to use:

Suppose a warehouse follows a LIFO system;
it received 300 packets in 1st month costing Rs 100 each and 200 packets of the same material costing Rs 150 each the next month(because of certain other reasons). Now if there is an order of 250 pieces with a selling price of 125, then ;

The items sold will the last 250 that were brought in- So the cost bore would be
200xRS150 + 50x RS100=RS 30000 + RS 5000

=Rs 35,000

While , selling price,
250x RS 125= Rs 31250

Hence if LIFO is used and the manager doesn’t know about it , his firm will end up in a loss  Rs 31250-Rs 35000(-) Rs 3750.


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