Inventory costs
You control the cost of inventory items and tools by using a range of costing methods. You can set a standard cost, or you can issue inventory items at an average cost so that price variations are reflected. Last-in-first-out (LIFO) and first-in-first-out (FIFO) costing captures and applies the cost of items on receipt.
LIFO and FIFO costing is more precise than other costing methods. You can monitor the value of your inventory stock based on actual receipt costs. The costing method that you apply is used whenever an inventory transaction occurs.
- LIFO costing
- Last-in-first-out costing uses the receipt cost of items that are the newest in stock.
- FIFO costing
- First-in-first-out costing uses the receipt cost of items that are the oldest in stock.
Example
Prices generally rise over time because of inflation. As a result, the older inventory items in stock can decrease in value. Under the FIFO costing method, as the older and cheaper goods are sold, the newer and more expensive goods remain as assets to the company.
A company that uses the LIFO costing method sells the most expensive (newest) inventory stock first. As profits are decreased, the company benefits from a lesser rate of tax.