FIFO, LIFO, FEFO, LOFO and HIFO methods - how to use them?

FIFO method

FIFO stands for 'first in, first out' and it is a method of inventory valuation based on the assumption that the first items purchased or produced are the first ones to be sold or used. In other words, the oldest inventory items are sold or used first, while the newest items remain in inventory. This method is often used in industries that deal with perishable goods or products with a short shelf life, such as food or pharmaceuticals.

LIFO method

LIFO method, short for Last-In-First-Out, is a method of inventory valuation where the last items added to inventory are assumed to be the first sold. This means that the cost of the most recent inventory purchases is used to calculate the cost of goods sold before any older inventory costs are used. The LIFO method is particularly useful when inventory costs are rising, as it allows a company to expense the most expensive inventory first, which can help to reduce taxable income. However, it can lead to inventory obsolescence and can be difficult to manage.

FEFO method

FEFO method stands for First Expired, First Out. This means that the products with the earliest expiration date are the first to be removed from inventory. This method is commonly used in industries such as food and pharmaceuticals, where products have a limited shelf-life and must be sold or used before their expiration date. By using the FEFO method, companies can ensure that their inventory is constantly rotated, minimizing the risk of products expiring and becoming waste.

LOFO method

The LOFO (Lowest Cost + First Out) method is another inventory management technique that is based on the cost of the items. In this method, items with the lowest cost are the first to be sold or used, and newer items with higher costs remain in inventory. It is similar to LIFO, but instead of using the order in which items were received, it takes into account the cost of the items. This method can help businesses manage their costs effectively by using up the least expensive products first, and therefore reducing their overall expenses.

HIFO method

HIFO, or Highest In, First Out, method involves prioritizing inventory that has the highest cost per unit. This means that the items with the highest value will be sold or used first. This method can be useful for businesses that have items with varying costs and want to maximize profits by selling the most expensive items first. However, it can also lead to the accumulation of lower value items, which may eventually become obsolete or expire.