2. LIFO method
The LIFO method or last-in, first-out technique asserts that the last stock added to stock will be the first sold. At the end of an accounting period, the stock leftover would be the oldest purchased goods.
The disadvantages associated with this costing method outweigh the advantages. Many companies would consider this stock management technique unrealistic, as businesses seek to sell their oldest stock first. The LIFO stock valuation method is typically inaccurate with its stock value portrayal as it generates prices that fluctuate throughout the year. Overall, many industries opt to use FIFO over its counterpart, LIFO.
LIFO example
Say Robert runs a jewellery shop and uses the LIFO costing method to manage his stock. Suppose he buys 100 silver necklaces at $25 per necklace. Later, he chooses to buy another 50 silver necklaces, but this time, the price has gone up to $30 per item.
If Robert uses LIFO to determine the cost of his stock, the first necklace sold will be priced at $30, even if it came from the previously ordered stock. Following the last-in, first-out method, the first 50 necklaces would be assigned the cost of $30, while the following 100 necklaces sold would be priced at $25.
