Question

Explanation of how the LIFO method works under the perpetual method?

Answer 1

LIFO is the Last in First Out Method of inventory valuation

The last-in, first-out (LIFO) method of inventory valuation assumes that the last costs incurred to purchase merchandise or direct materials are first costs charged against revenues. In other words, it assumes that the cost of merchandise sold (in a merchandising company) or the cost of materials issued to production department (in a manufacturing company) is the cost of most recent purchases.

Take the following example

• Aug. 01: Beginning inventory; 20 units @ $40 per unit.
• Aug. 07: Sales; 14 units.
• Aug. 12: Purchases; 16 units @ $42 per unit.
• Aug. 17: Sales; 8 units.
• Aug. 23: Sales; 4 units.
• Aug. 27: Purchases; 8 units @ $44 per unit.
• Aug. 30: Sales; 10 units.

Required:

1. Prepare a LIFO perpetual inventory card.
2. Compute cost of goods sold and the cost of ending inventory using LIFO method.

Solution:

(1). LIFO perpetual inventory card:

(2). Cost of goods sold (COGS) and ending inventory:

LIFO perpetual inventory card (prepared above) can help compute cost of goods sold and ending inventory.

a. Cost of goods sold (COGS): $560 + $336 + $168 + $436 = $1,500

b. Ending inventory: [$240 + $84] = $324

When LIFO method is used in a perpetual inventory system, it is typically known as “LIFO perpetual system”.

The above example explains the use of LIFO perpetual system in a merchandising company. In manufacturing companies, it is used to compute the cost of materials issued to production and cost of ending inventory of raw materials (also known as direct materials). Consider the following example: