Thursday 12 May 2011

How To Take Inventory using the LIFO Method

LIFO stands for “Last-In-First-Out” in an inventory costing method. It is one of the most popular methods for keeping tabs on the progress of an inventory. The premise of this process is that the last item you have encoded in your inventory is the first item that you have sold in that year. If you are running a big business with several products, you might want to consider using this method for your inventory. This is very handy if you need to compute for the cost of goods sold in a year.

To use the LIFO method, follow the simple steps below.

* Organize your product list. Refrain from maintaining a single list for all of your different products. Do not mix bananas with apples. Organize your product list into separate sheets. Group similar products together and record sales separately.
* Use “batches” to record the inventory. As products usually come in groups, it is best to record them per batch. This should also give you a high-level overview of the products delivered. In addition, it will be easier for you to track down which batch comes in last as this is important for the LIFO method. For example, record “Batch 1 – Cost: $1000, Quantity: 20 pieces”, “Batch 2 – Cost: $1800, Quantity: 30 pieces” and so on.
* Compute for the cost per batch. Take the example from the previous step. Compute for the cost of goods for each batch. For batch 1, get the cost by dividing 1,000 by 20 and batch 2 by dividing 1,800 by 30. This gives the values of 500 for batch 1 and 600 for batch 2. If you end up selling 35 units at the end of the year out of the 50 products delivered, then, the 30 out of the 35 units that were sold for the year is at $600 per piece and the 5 others are at $500 per piece. The remaining 15 units in your inventory are to be sold at the same rate as batch 1, which is at $500 per piece.

How the LIFO method works is best described in the same manner as how you would fill a can with coins and use its contents later on. If you are to place a few coins in a can regularly and the time comes that you need to get some coins from it, the last ones you put in are the first ones you will be taking out. The coins that are added last are easier to access, thus they are the first ones to be consumed.

Double check the values you indicate in your inventory as a slight typo error can cause a lot of confusion. Also, have a certified accountant check your record for tax calculations at the end of each year.
To make the computations easier, you can use basic spreadsheet applications such as Microsoft Excel. Create a template for your LIFO method using this software to create a faster and more accurate inventory process in the future.

No comments:

Post a Comment